Search

Speaking of Romania the Slovakian koruna will be no more as Slovakia has been accepted into adopting the euro starting Jan 1, 2009 (save for a potential snag or two ). I don't know a lot about Slovakia but the bigger macro for these countries is smaller, faster growing, cheaper labor, younger population than the European old gard makes them generally attractive as an investment destination. IndexUniverse is reporting that there will be two platinum related ETNs from ETRACS listing very soon, one will go long platinum and have ticker PTM and the other will go short platinum with ticker PTD. This chart compares the platinum product from ETF Securities in the UK versus GLD (client holding). The basic case for platinum as I understand it is there is less of it than gold and it gets consumed for industrial purposes. Van Eck launched a double long euro ETN, ticker URR, and a double short euro ETN, ticker DRR. These look a little funky to me as there are more moving parts to the calculation than you might think. IndexUniverse explains it here . According to the IndexUniverse article the index for URR is up 12.8% YTD through April 30. According to Yahoo Finance the Rydex Euro Fund (FXE) is up 6.9% so despite my perceived funkiness that seems pretty reasonable. DRR YTD through April 30 is down 10.68%. Rydex has filed for new currency ETFs; Russian ruble, Hong Kong dollar (this is an odd one, HKD is pegged to the greenback), South African rand and Singapore dollar. Hat tip to 24/7 Wallstreet for this info. All of these new products, which I just heard about yesterday, tie in with the ongoing thread of more products allowing for more sophisticated portfolios. For do-it-yourselfers who are inclined to learn about them and proceed with moderation (this comment assumes the products all work which remains to be seen) I think this is a big positive. Anyone saying they can't keep track of all of them, I hear you. There have been a slew of double long and double short commodity products that I cannot keep straight. For my tastes commodities are volatile enough that single exposure is good enough for me. As more things come it creates some interesting sorts of pairings like trading the spread between platinum and gold or the AUDNZD rate (once/if the WisdomTree New Zealand ETF lists). Even if you have no plans to make these sorts of trades learning about them may offer some utility for what you are comfortable doing. Of the products mentioned in this post I am most interested in the Sing dollar. I have been interested in it for a while, hopefully they follow through with it. One commodity ETF or ETN I'd like to see is coffee. I am of the opinion that coffee consumption in Asia could skyrocket yet still have virtually no market share but if correct that could have a meaningful impact on the supply and demand equation for coffee. To be clear coffee will never be the drink of choice in Asia. And finally from the hey that farm in Uruguay doesn't look so bad file is this rather lengthy look at the state of the US power grid. Yikes. [ABSTRACT FROM PUBLISHER]

One term I hate is "making a list." In various interviews the person being interviewed might be asked about making a shopping list of names to buy for when things get cheaper. While I am being overly critical it seems that many do-it-yourselfers are in to whatever extent they want to be in and so buying some stock when it gets cheaper probably means selling out of something else that might also have gotten cheaper. "That being said, I do have some thoughts" (that was Austin Powers' line to Stephen Spielberg at the start of the movie Gold Member). I have been clear that I think the odds now of a bear market are very high, if I am right it would have already started but who knows? If that turns out to be correct that means the bear market will last however long it lasts, I believe 18 months is the norm, and then it will end. For anyone who is inclined to make any changes ever to their portfolio, the transition from bear to bull would be one of the times to make some changes. I've probably picked out seven names so far to rotate in to the mix which would probably change the overall characteristics of the portfolio by a noticeable amount. At this part of the cycle reducing volatility (for me that mean more cash, some double short and a larger cap bias) makes sense. Coming out of a bear I would think it makes sense to increase volatility (so I would have less cash, no double short and have a smaller cap bias). The next question becomes when does it makes sense to make these changes? There are a couple of easy answers but I doubt it will end up being so simple. My hunch about this bear market (assumes for the time being I am correct) is that it will be normal. Normal is 25-30% and we are already down 9-ish%. At down 20% I might make a first, small step to reduce the defense, maybe a little more at down 25% and maybe a touch more at down 30% if we ever got there. Another simple idea would be to make changes when the market takes back its 200 DMA after a bear market decline. This is a little trickier because I will be wary of any move higher if this does not devolve into a bear so in a way we'll have to see what the market gives. To be clear this is something that, if I am right, would play out over more than a year. Since there is no way to know what the market will do or when it will do it I think it makes sense to explore and be ready with a couple of different paths you might take, this is if you do any of this. I mentioned I have about seven stocks picked out for now, the seven may change and I expect there will be more in the next few months. The names don't matter as that is not the focus of this site. I would say is that I am trying to go sector by sector and exploring ways to add beta for whenever the next cycle starts. [ABSTRACT FROM PUBLISHER]

John Hathaway, the manager of the Tocqueville Gold Fund (TGLDX) had a take in Barron's on why gold can move higher that I don't recall hearing before. Perhaps people have been saying essentially the same thing but still I thought this was interesting. He said "t he disparity between the amount of paper that has been created since 1980 and the amount of gold that has been produced since then is just enormous." So we have had a much larger increase in the supply of money compared to the supply of gold. FWIW, Hathaway thinks gold can go quite a bit higher. I have been writing about having gold exposure one way or another since I started this site, three years ago yesterday by the way. The idea that it can zig when stocks zag has been tested a little bit of late. I own several things in the mix that I think/hope provide offset to domestic stocks. When the market is roaring I would expect gold to lag but sometimes, like the month just ending, gold does even better than stocks. Maybe a way to think of it is that gold may not a great hedge for market events but could offer a lot more protection against an external shock like a terror attack. If that line of thought makes sense to you then it may be possible that there will be long periods of time where it does very little as was the case from February of this year until August. Personally I do not think this is a bad thing but some folks will not be patient enough to endure sideways action for that long. I am no gold bug but I do believe that a diversified portfolio needs to include exposure to something that gets mined or to a company that does mining. The theme has been a huge contributor to gains in the last few years and I think will continue to be very important for the next several years. A reader asked what currencies I think will rise the most against the dollar and how to inve st in them. The thing behind the thing for my currency exposure is not to game the forex market. I believe in foreign exposure to stocks, bonds and cash . The best diversification would probably a currency from either a surplus economy or a commodity based economy. Rydex has eight single country currency ETFs and iShares has three ETNs. Beyond those it gets difficult to access single countries. I use short term government bonds from Norway, but not for everyone, as a proxy for the krone. The minimum buy is $100,000 which is easy if you are buying for a bunch of people, pretty tough for an individual. Everbank has various products but I personally am not a fan of locking into a CD. I think you can buy $10,000 worth of many single currencies in an account without buying a CD but I do not know the particulars. I Tivo the Saturday morning Fox shows so I can fast forward through the political commentary (if I wasn't black balled from their channel before I am now, eh?). On this week's Cashin' In I only watched Trapper's picks during the last two minutes and I got a chuckle when he picked the double short ETF that I use and have written about so often of late. He actually called it a double short fund. Also from Barron's Trader column, there was a short write up on Smithfield Foods (SFD), apparently the company is having a problem with "swine fever at some of its Romanian hog farms." How many Romanian hog farms do they have? I'm not sure why that cracks me up but it does. If you have been reading blogs for a while you might recall the blog called Inventing Money , written anonymously by Slash, which as been on hiatus for quite a while. Well he back posting again, stop on by and check it out. The picture is from New Zealand. They may not quite have their current account where they want it but they are not wanting for scenery. [ABSTRACT FROM PUBLISHER]

A long question came in about when to undo a defensive strategy. The reader joked that "I'm right, until I'm wrong" may not be the best plan. Click here to read the whole comment. I can only try to answer this from the context of how I get defensive, what I have done before to get less defensive and to point out that I have no expectation of being exactly right with what I do. Some of this will also be discussed in this weeks video. The first thing to mention is that I say at every turn that I do not make big bets. In getting defensive I start small so that if the sentiment gets whipsawed the portfolio won't. Earlier this summer I sold one stock and added about 1.5% to the double short fund with the willingness to do more if the market had deteriorated any further. Last summer I did something similar and my lead versus the benchmark unwound, this year it appears to have increased (details to come in the video) due, I believe, to the snap back in certain parts of the market. With all of the action that transpired this summer I took very minimal action. The focus was to be disciplined to my defensive strategy while at the same time realizing that the market was in a fast panic and dumping a lot of stock into it, as some readers commented that they had done, would be the wrong trade. I commented countless times this summer that it was a fast decline and that fast declines snap back quickly. Last year as I held the double short fund and the market snapped back the double short fund got smaller and the rest of the portfolio got bigger so in a way the position reduced itself and along the way, but I did wait a little too long before adding a couple of new names into the portfolio. The decision to add was probably more gut than anything else, so not very scientific. The result for all of last year was about even with the market while sitting on a lot of cash and a little double short. What I said on the blog then, and this is a cornerstone to my ideas about how manage money and I have written many times, is to not let being wrong bring down your portfolio. I wrote going into last years double short purchase and after the fact the lagging a huge rally is nowhere near as bad as missing one. I lagged for a while to be sure but did not miss it. It appears as though I am not lagging the current snap back. Going forward, I have talked about adding a financial name when the yiel d curve normalizes and I also have a couple of other stocks I have learned and will probably buy soon as a way of deploying the above average cash position I have disclosed having. If this summer had devolved into down a lot, and I should say no matter what emotion you might have felt we were nowhere close to down a lot, getting un-defensive would occur when the market takes back the 200 DMA. This time around the market was down a little and the breach of the 200 DMA was short lived. I don't have an exact answer to Rick's question because the way things have played out, my not making large bets, I have not needed to have one. I am mostly in, have been mostly in, and have more names to buy but am not sure when I will buy. The action taken this summer has left me underweight volatility and consistent with my opinion that we are very close to the end of the cycle this is where I want to be for now. In conclusion there is some objective market indicators at work, a belief in moderation and a big picture opinion of what I think is going on. In terms of portfolio execution it has been right so far. It could start being wrong at any time. As I mentioned yesterday, and many times last summer, if the market explodes higher and I leave a few percentage points on the table being cautious (so lagging not missing) I would be thrilled. I realize not everyone will like the answer but that's what I have. [ABSTRACT FROM PUBLISHER]

The poll question from the video drew some interesting responses and questions that I'll try to answer here. RW has been shooting the lights out with some good short sales, congrats. As far as his question about call writing funds that own foreign stocks; I am aware of two a Blackrock fund with ticker BOE that I own personally and for clients and an ING fund with ticker IGD. I would also suggest checking with Eaton Vance; it seems to me that they have one but I am not sure. There were a couple comments surrounding the YTD number for the S&P 500. It closed 2006 at 1418.30. It closed Friday at 1479.37. That is a gain of 4.305%. Next add 88 basis points for two dividends (ETFConnect has the yield for SPY at 1.77% and it works out to 5.185%. As for VFINX, the Vanguard fund, I have no idea how closely it tracks the index. One reader asked what it would take for me to become more sanguine on the markets given the lift. Well lets not forget I might get this wrong but thanks to the snapback noted by some readers in emerging, commodities and a couple of foreign names my having added to my double short fund the day of the discount window cut is not holding me back. It might start to when the snapback effect peters out. As far as being sanguine it just doesn't add up to me that the events that unfolded won't create another down leg of some sort. I added some double short last summer with bad timing, the market went up a ton and I lagged that up move slightly. I said going into that trade I would be thrilled to lag a huge move up and the same holds true now. If from the low we go up 25% before doing anything else and I lag by 3-4%, that would be a fine outcome. Market up 20 plus percent and you are close either way, you are doing just fine. As for the discount brokerage question. We use Schwab but I have my HSA at Options Express because Schwab doesn't have an HSA yet. The commissions are in the $15s which is not competitive but everything else about my experience with them has been superior to Schwab by a mile. The other comments about performance were very useful and it seems as th ough my thought was unreasonable so apologies for being insensitive. Hopefully I can offer a couple of constrictive nuggets toward these comments. A lot of the results that were lagging one way or another had some recurring points. People love the closed end funds. I say the same thing about them over and over; moderation. The slapping these funds have taken is far from unprecedented and they will get slapped again during the next financial panic. They do snap back in varying magnitudes but they create volatility when you least want it . Selling during the snapback is probably not a great idea but if you learned you have too much invested I would say to lighten up when things normalize. My weighting is modest and is for areas that are not otherwise easily investible with other products. One reader ran into problems with stop orders. I have written essentially the same thing about stop orders many times in the past. Stocks go down at different times for different reasons. In that context using the same type of stop order for all times makes no sense to me. And as the reader notes, when do you get back in? Someone is going sell at the bottom tick for every stock. It might be you on your stop order. That will happen every so often and that is OK but if you got stopped out on enough of your holdings at down 8% a couple of weeks ago that it dramatically changed your allocation and you didn't get back in two days later when it took back the 8% figure, well what then? Mind you, I am not saying I would have jumped in two days later but this all points out that a lot of sales in a fast decline (you gotta be sick of me writing this by now) is a bad idea. BillB, I said the comment from anonymous was harsh in the context of how defeated the person seemed to be in the comment not that he was picking on you, sorry for the poor choice of words. Is 72% in fixed... [ABSTRACT FROM PUBLISHER]

The market has certainly been on some kind of wild ride the last few days. The selloff on Friday was clearly a panic down but Monday's rally was arguably a panic up. If so, I am not sure anything is really resolved. A one day decline of 2.5% isn't really capitulatory especially when the rally the next day is just as big. The internals were not great for such a big day either. On the NYSE there were 52% advancing and 47% declining according to Yahoo Finance. I also think that the huge run up in the financials after getting pasted on Friday, along with these other things leaves me questioning the market's short term health. But of course nothing may come from this concern. I noted last week I was weighing the sale of one particular stock or adding to my double short position. About half way through the day I sold the stock, Starbucks (SBUX) but did not add to the double short. SBUX is a discretionary stock, a sector I am and have been underweight for a while. Discretionary is usually not a great place to be heavy toward the end of the cycle and this has been the right call this year, as measured by the Discretionary Sector SPDR (XLY) but Starbucks has struggled so I sold it. Given the market action Monday I don't mind having a touch more cash raised. From the bottom up SBUX has had trouble off and on with various estimates and while I believe people will always wait in line for a fancy coffee the stock has been a let down for quite a while. If the stock goes up from here it will look like a bad sale and if the stock goes down it will look like a good sale. As I write this now there is no way to know but a touch more defense by lightening up in the wrong sector feels right for now. [ABSTRACT FROM PUBLISHER]

I have no idea what the market will do on Monday or later in the week but this might be worth bringing up now in case I can't post in the morning. If there were to be a actual crash like in 1987, what would you do within your portfolio? There is no right answer for everyone and for some people the right answer is to do nothing. Whatever is right for you you should know in advance what you would do or maybe have a couple of different plans in place. If the market did crash, I know my double short would go up and I expect (but maybe not) gold would go up. Assuming no crash (which is the better bet) I have figured out how much double short to add for each account now that the market is below its 200 DMA and that is one option I might pursue but if the market fell 20% tomorrow I would be more inclined to sell what I have as opposed to buy more. Further I can see where some of the foreign stocks would not go down as much especially if the "crash" came later in our session. There might be a delayed reaction the following day in the ADRs and so I might sell an ADR into the crash too. I might also sell my gold in that type of scenario. I don't have it exactly figured out to the minute each exact action I would take and when but generally speaking I have a plan in place if there is a crash. This becomes even more important for people who are prone to emotion. The idea of lifting hedges in the manner described may seem counter intuitive but there is no bigger panic than a one day 20% decline. After a crash fear will be off the chart and while I may not have the stones to buy stock for clients on the day of a crash, it doesn't change the history of crashes; they exhaust almost all of the sellers. Someone will probably leave a question asking what if it keeps going and while it might, I am unlikely to think this is any different than other big panics. I would also add that even though I would expect a snapback after a crash, selling into that snap back might be the better trade but I'll weigh in on that if it happens, which again I am not expecting. [ABSTRACT FROM PUBLISHER]

There have been a couple of comments making reference to the use of double short funds to hedge. I do this for most accounts. One thing about the use of these funds to keep in mind is that as the market goes down the size of the the double short you own gets larger relative to the rest of the portfolio meaning it hedges more and more as the market goes down. If you take no action into a decline, and this post is not about whether you should or shouldn't, you will become more hedged. To use a simplified example. An account has $90,000 in SPY and $10,000 in the double short S&P 500 fund (which I own for clients). The market then drops 10%. The SPY is now worth $81,000 and the double short is now worth $12,000. $12,000 is obviously a much larger percentage of the total account of $93,000 (after the drop) than the $10,000 was of the total $100,000 before the drop. Keep in mind that this example is very simplified and that there is no guarantee as to what a double short fund will do. [ABSTRACT FROM PUBLISHER]

I don't know what it is about late June/early July up here but we had a real fire about a half mile from my house. I was on my way back from town on an errand that was in itself wacky, I smelled smoke, slowed down, saw a lot of fire that appeared to be two acres in size so I hauled the last little bit to my house.Joellyn was already getting ready, I got my fire gear and had a crew pick me up down just below the fire. I was initial attack and the first incident commander. I titled the fire the Snap fire because we anchored on Midnight Snap Road. I called for Forest Service support and air support and made a couple of other decisions that turned out to matter before ceding command to the Forest Service who changed the name (damn!) to the Midnight Fire.After ceding command I then tied in up top with a bunch of different agencies to mop up. I was there from about 3:30pm until about 8:30pm. I may have more pictures coming from a neighbor.On a personal note, I can't believe Joellyn and I do this. Despite the intensity, it is very rewarding and fun.Onto some ETF stuff.Index Universe reports that ProShares has filed for inverse bond ETFs and inverse foreign ETFs. This has been a theme here of late that there will be more products to allow for some sophisticated risk reduction strategies or maybe just hog wild speculation.The filing includes short and double short EAFE, Emerging Markets, Japan and China. For the bond ETFs they are short and double short 7-10 year, 20 year plus, liquid investment grade and high yield.Assuming the fixed income funds are like the equity funds, you could get a T-bill rate and own an appreciating product if rates go up. That could be very important over the next five years.Also included in this filing is double long, short and double short biotech and telecom.Other ETF news is that Claymore almost granted my wish of a product of global exchanges with a fund whose name is too long but the ticker is EXB. It is 1/3 exchanges, 1/3 asset managers and 1/3 investment banks per what I was told in a phone call about the fund. It is 66% US. The largest exchange weighting is NYSE Euronext at 4.57% but there are four other stocks with greater weightings. The foreign exchanges each have very small weights and may not be able to move the needle. [ABSTRACT FROM PUBLISHER]

From the hmm, this might be interesting file... The chart compares the Double Short Long Bond ETF (TBT) versus the Single Long Long Bond ETF (TLT) since TBT's inception. I have been in the camp that thinks US interest rates are going up. This call has been wrong or early (take your pick) but I still believe it will be the case. If that turns out to be correct then longer dated bond funds stand to get hit. As a rule of thumb an increase in rates of 100 basis points on long dated paper could be expected to cause an 8% drop in price. With individual issues you do get the par value back at the end but with funds there is no par value that has to be made back. With about three months of data (not a huge sample, I admit) it looks like TBT is zigging against TLT's zag. Since inception of TBT yields have dropped a little so TBT is down in price. An investor putting $10,000 into TLT on May 22 (day one for TBT) and $5000 into TBTwould have $14898 at yesterday's close plus two dividends from TLT totaling $73.04. So in this example the net loss was $29 or 0.019% which is pretty good if the position really is hedged and considering that he market went against the position. One administrative note about TBT is that it too pays a dividend but the dividend should be annual at the end of the year and represent t-bill interest less the expense ratio. If rates do go up, including t-bill rates, then TBT would probably pay much more than it is likely to pay now. A combo of TLT and TBT where TLT yields 6% and TBT yields 4% and the portfolio is protected from rising rates sounds pretty good to me. Obviously the idea makes no sense at all for anyone disagreeing with the higher rate scenario. Personally I would need a little more time to be convinced the zig zag will stand up. The objective of TBT is twice the inverse on a daily basis. I think the reason it appears to be working for now is that market captured is much less volatile than equities where the leveraged products are a little less predictable. If there is any there there then a TLT TBT combo could be thought of as the basic strategic building block. Anyone so inclined to tinker might come up with other ways (meaning other products) to implement some sort of hedged combo. In the context of brainstorming and exploring, anything goes at this point. Yaz, get well soon. Last night, Red Sox announcer Jerry Remy said that Yaz would be getting bypass surgery at Mass General. Later in the game they reported that the surgery was successful. [ABSTRACT FROM PUBLISHER]

As a follow on to yesterday's post about looking down the road , today is another type of road to look down. As the market flirts with "official," ahem, bear status there are a few truthisms, as my friend Charlie would say, about the current state of affairs. First is that stocks are down a lot. They may drop more (as I think will be the case) or they may not but they are down a lot. As we are nine and a half months and 20% from the peak we are obviously that much closer to the real bottom and then the real upturn (which I think will be Q1 2009 using a liberal adaptation of the 2/3 1/3 rule). The other truthism is that there will be a bottom at some point, maybe when I think it will come or more likely at some other time and then there will be a new bull cycle of some sort. That we know these are truthisms but not when any of them will come into play it makes sense to think about that next bull cycle and think about what you will do when it comes. To be clear my trigger point for meaningful reequitization will be when the S&P 500 takes back its 200 DMA which appears to be a long way off. For now I have a list of stocks, going sector by sector for sectors where I do need add once the bear ends (for clarity, I have been overweight utilities and so as of now not looking to add there). I have been underweight financials for a long time and will need to add exposure there. As of right now that will mean a publicly traded exchange (these are down a ton and the mortgage crisis doesn't really touch them) and a foreign bank (many of them have fewer moving parts than US banks). With industrials I will need to increase the volatility, reduce the cap size, increase the foreign exposure and wade further into a couple of themes. In tech the plan will be to increase exposure, add emerging and introduce a little more single stock exposure. If energy continues to correct it will make sense to increase volatility within. Over the last couple of years I have disclosed moving to a little less risk and selling down some Statoil a couple of times along the way. At some level (eye of the beholder) ratcheting things back up becomes the right thing to do. Here I might swap some ETF exposure for a service company and more of a theme play. In telecom I would expect to swap some developed exposure for some emerging market exposure. Over the last couple of years I have taken a little EM exposure off and this is an easy sector to add it back in (plenty of stocks and even a CEF that I have used in the past). Discretionary has been very underweight for a long time and so it needs to be beefed up a lot. A retailer or two and something that seems like an obvious beneficiary of baby-boomer spending makes the most sense right now. Staples probably need to come down a little, I'll probably just sell one name. I think I am ok with healthcare, utilities and materials. Embedded into the above is the need to add China back in, add several themes that I have been writing about, as touched on above, more emerging markets, reduce the average cap size, increase the volatility, possibly let the yield go down, maybe change the style tilt and remove the double short. This is just a game plan that obviously (or maybe not, lol) I have thought about a lot and can change if circumstances dictate. I am looking forward to moving ahead with this and reequitizing. The job of managing a portfolio becomes easier when you're just managing exposures and not wondering is the bottom in? How about now? What about right there now? The reequitization question would be off the table because you'd be in (assuming you had a well thought out and disciplined exit strategy and have a well thought out and disciplined reentry point). My approach of using the 200 DMA means I will not catch the bottom but by never going 100% cash I won't miss it which as I have mentioned more than a few times missing a big bounce off the bottom is far worse than lagging it. The picture is a road in Iceland ... [ABSTRACT FROM PUBLISHER]

I was on the phone with a friend who works in the business yesterday and we were talking about how much further down/what the bull case is and he mentioned that there had not been much in the way of capitulation. I made a joke that we had a pretty solid five minutes worth a week ago Tuesday. Obviously I don't know whether yesterday's smackdown was an end to the feel good rally that started last week or just a bad day but I have found myself getting a little annoyed at the escalation of the cheerleading (my perception) that ensued on the network. Hopefully by now you buy into the idea that bear markets work a certain way, take a certain amount of time and have rallies of varying magnitude along the way to bottoming out. There is nothing bad or upsetting about normal cyclical activity. I fear that the way the cheerleading is done might serve to ramp up the emotions of market participants who maybe don't have a lot of experience with bear markets. Along the lines of a post from earlier this year there is nothing wrong with buying a stock you like that is down 25-30% from its high as long as you realize it might go lower if the current bear phase unfolds as normal or worse than normal. Buying a stock or two along the way is a different kettle of fish versus reequitizing a portfolio after getting whipped up by Kudlow's mother's milk spiel. The best time to buy stocks would be at the point you spelled out for yourself months ago when you devised an exit and reentry strategy. Hopefully if you have been reading this site for a while, and this sort of action is appropriate for you (investor know thyself), then you did think about exit and reentry and did so at a time when you didn't have a care in the world. Scrambling into the teeth of a big decline is a bad place to be. A lot of the interviews we see ask what should investors do now. At 1252 on the SPX, down 20% from the October high and 14% YTD, a lot of the horses are out of that barn. I've disclosed how I sold a couple of things along the way and added some double short relying on an indicator read about in a magazine in 1993. That indicator triggered ages ago so most of the work was done ages ago. The notion put forth in these interviews of what should an investor do now makes the task of navigating the market's cycles more difficult than it needs to be. Hopefully you will take this as a reiteration of something that I've attempted to convey since this site started almost four years ago. If this bear market has not worked out for you will have a chance in future bears to heed the advance warning, again if this is appropriate for you to do, and perhaps sidestep some of that decline. [ABSTRACT FROM PUBLISHER]

It is tough to tell but the green in the picture is the Green Monster at Fenway. The clay color is the left field warning track. I took the picture from the top of the wall--its a long way down. So from the I'm not sayin' I'm just sayin' file; a quick word in case we all get a reminder over the next few days about how trading curbs and circuit breakers work.... The news about Fannie and Freddie kicked up a notch obviously and we have a potentially long two days of just waiting. The market action of the last many months has been a normal bear market process--scary news, various moves downward a feel good rally and so on. If there is a violent move down, IE a crash, well first it can't be 20% in a day because the market will close before that happens. The modern day equivalent of 20% in a day might be 20% over two or three days. Panics snap back. This is a just how the market works type of thing. A panic and snap back can occur in a bull market (like 1997 Asian contagion or the 1998 LTCM/Russian debt default) or in a bear market like last January in le affair du Kerviel (hey, I took Spanish in school). If we were to see a big panic I would close out my double short position as I did in January . At this point I do not know if after closing SDS out I would get more long right away, which I did not do in January or when I would buy SDS back (on the Kerviel trade I bought it back later that week) but the point is I have the first step of a plan in place before anything happens. The rest depends on what the market were to give in that scenario. A plan could include doing nothing, depending on the appropriate thing for an individual but deciding ahead of time that "since selling is not right for me, I will not panic along with the market" is a valid course of action. Lastly a reader follow up question about why I think a bailout of Fannie and Freddie would weaken the dollar. Not to get too jargonny or sophisticated, lol, but one problem with the dollar is no one wants to hold it. Plenty of places have to hold the dollar but they don't want to. I saw one thing early today, maybe from Yves, that opined that bailing out the GSEs would double the US' debt. I don't know if that is accurate but obviously the US' debt load would skyrocket. Further indebtedness (we are talking a lot more than Dr. Evil kind of money), everything else being equal, is bad for a currency. This leads to another comment I made yesterday (far from an original thought I might add) but at what point does the dollar get defended by anyone? I don't know as I'd have liked to have thought it might have started by now. At some point interest rates should go up, this is how markets work--of course this sentiment has been wrong for a while. All of this creates the environment I have been writing about for ages which is weaker growth and higher rates. This is not apocalyptic but it makes the case for the US being a less attractive investment destination than other countries as has been the case for most of the naughties, or if you prefer, the oughts. [ABSTRACT FROM PUBLISHER]

A reader asked for a recap of how I use the 200 DMA in deciding on defense and offense. The big macro is that demand for equities is either healthy or it is unhealthy. If it is healthy you should be in. If it is unhealthy you should be out. In practical terms 100% in or 100% out does not work, the real world application is that you focus on growing the account when demand for equities is healthy and you focus on protecting assets when demand is unhealthy. There are multiple ways to gage health of demand and while they might have slightly different trigger points they are close enough to each other. I think the 200 DMA, all by itself, is the simplest way to go, as opposed to some sort of moving average cross over. Taking some sort of defensive action should help avoid a chunk of down a lot, no guarantees of course. The reader asks if I use this approach with sectors. Short answer; no. I believe in maintaining a diversified portfolio which means always having some exposure to each of the big ten S&P 500 sectors. My process for deciding underweights and overweights is derived from a combo of how sectors have usually behaved at similar points in previous cycles, an assessment of current events and anything else I might know about like the yield curve and financials or interest rates and utilities. Also a part of this part of the process would be the increased exposure to things that don't necessarily correlate to the stock market. Next he asks something about 200 day in a macro versus micro context but candidly I don't think I understand this part of the comment. What I'll say is that I am trying to make this as simple as possible. If demand for equities as measured in the manner described is unhealthy then I will take some sort of defensive action. I will reduce or take off the defense when demand gets healthy again. The goal with this is not down zero in a bear market just down less. Lastly the reader asks about why I think this bear market will be normal, is there some way that I quantify my opinion. First I should disclose that I don't need to be right about this. I disclosed, almost in real time, the defensive action I took in 2007 toward my goal and consistent with my exit strategy. If the market continues much lower, past what most would consider as being a normal bear, and I do nothing else, the double short will grow versus the rest of the account thus neutralizing more an more of the portfolio. I've outlined in many previous posts how similar the end of this cycle looked to past cycle-ends in terms of market action and sentiment about how different it is this time around. Last summer very few people were worried about a bear market, which is typical, and now many people are worried about how different this is because of housing, inflation, housing, deleveraging and so on. No matter what your level of concern or bearishness, I am telling you that this time is different has pervaded every time at the end of cycle. When Iraq invaded Kuwait in 1990 the market swooned and the fear was enormous said the guy who was trying to open accounts at the time by cold calling for 12 hours a day. If it is different, fine, I'm confident in the steps taken that I wrote about last year but right here right now we are well within normal but no I do not have a specific way I quantify my opinion. Having been through these before and somehow the fact the I remember what the sentiment is like every time contributes to my opinion. [ABSTRACT FROM PUBLISHER]

Macro Shares filed for two ETFs that allow for gaming real estate prices as measured by the S&P Case-Shiller Composite 10 Home Price Index. The 10 in the name refers to the ten cities in the index which are Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, and Washington D.C. One fund will go double long the index with ticker UMM and the other will go double short the index with ticker DMM. You can read more about these from IndexUniverse and 24/7 Wallstreet . We all know that real estate prices have been going down. One report a couple of weeks ago, via Bloomberg , had the Case-Shiller 20 Index (so a bigger sampling) declining by 14.4% versus the previous year. For now there seems to be no consensus of how long before the house decline bottoms and turns around. Speculation on when the turn occurs could make both ETF very popular when they list, assuming the funds do list quickly. Both oil macro shares garnered a lot of attention for the unintended consequence of trading very far their respective NAVs. One explanation I heard for this a long time ago, but it may not be correct, was that the oil macros had to price in the reality of contango and backwardation that exists in the oil market. I do not know if the new home price macros will have some other unintended consequence like maybe stemming from how Case-Shiller indexes don't price cash indexes only futures markets. At least I could not find cash indexes on Yahoo Finance, BigCharts or StockCharts.com. Assuming no unintended consequence and once the market does bottom it is possible that this becomes a one-way trade for a long time. The history of housing cycles seem to have far fewer downturns than with equities. Keep in mind this is just an initial reaction/hunch that could be several years away from even having a shot of being correct. Forgetting the specifics of the of these products, UMM and DMM stand to be the first of what I believe will be many more products that offer access to equity-like returns that don't really involve exposure to capital markets--things like GDP, carbon credits and some of the other ideas that have come up before in this site like maybe timberland in New Zealand and so on. I am convinced that the alternative asset space is going to grow, asset allocations will as a matter of routine include alternative assets along with stocks, bonds and so on and products like these will be part of the mix. It is still very early (UMM and DMM haven't even listed yet after all) and we all have more to learn but it will happen. [ABSTRACT FROM PUBLISHER]

Get ready for that triple shot whatever it is you order. Direxion Funds, the kings of levered products, just filed for a bunch of triple long and triple shot short ETFs. According to Index Universe the list is as follows; 1) MSCI Broad Market 2) Nasdaq 100 3) Dow Jones Industrial 4) S&P Midcap 400 5) Russell 2000 6) Nikkei 225 7) MSCI EAFE 8) MSCI Emerging Market 9) S&P BRIC 40 10) FTSE/Xinhua China 25 11) Indus India 12) S&P Latin America 13) MSCI Commodity Related Equity 14) Energy Select Sector 15) Financial Select Sector 16) DJ US Real Estate 17) S&P US Home Building Select As with the double long and double short these will, assuming they actually list and do what they are supposed to, open the door to several different types of strategies ranging from speculative gambling to what is essentially portfolio rocket science. As with the double products, the Direxion ETFs objective is on a daily basis not over any longer period of time. For an understanding of how this can create surprises for people; over the last 12 months SPY is down 5% but over that same period the double long S&P 500 (SSO) is down 20%. For the calender year 2007 SPY was up 3.5% and SSO was down 3.5%. That doesn't necessarily mean the product doesn't work but somehow the combination of up and down days netted those two results. I think the long products would give a better longer term result in a market that was trending up as opposed to a market that has been rolling over but that's just an opinion. Chances are some folks will get very aggressive with these, I would probably only be interested in the triple short S&P 500 or maybe triple short EAFE as a hedge for when the market is below its 200 DMA and some other folks will create some very sophisticated pairings of long/short, single/double/triple, different indexes and so on. A portfolio using only broad-based products could have neutralized out the financials very efficiently with the triple short financials without disrupting too much of the rest of the portfolio. Unfortunately the rocket science applications of these products don't get written about very often but maybe between now and when these funds list I can dig something up. While it should go without saying I'll say it anyway levered products used incorrectly offer the risk of an absolute blowup. A position on the wrong side of the trade on a day where the market moves 2% could result in an 8% loss. Check the math? No, the goal would be three times but occasionally it moves more or less than the objective and this sort of scenario on a given day is plausible. For anyone looking at these as an efficient hedge, trust me, a little bit will go a long way. The picture is from a coffee house Parua Bay in New Zealand. [ABSTRACT FROM PUBLISHER]

From the bottom to the top the chart shows a rally of 9.3% in about a month. That is an old chart with the date removed. The current rally is a little over 10% from the low in mid-March. The rally charted felt pretty good. The rally now feels pretty good. A while back I started using the term feel good rally (I may have made it up, not sure if I can take credit for it or not). The context of saying that is if the market is in the bear that I think it is, we will have several feel good rallies along the way. Feel good rallies are a normal part of the bear market landscape. This is either a run of the mill feel good rally or I am wrong and this whole financial crisis/housing price deflation/bond market distortion will turn out to be nowhere near as important as many people thought. What do you think is more likely? I am convinced this is a bear market rally, there is no convincing me otherwise. That does not guarantee I will be right of course. I think what I think but regardless of what I think I will add a name or two or shave off some double short if the S&P 500 goes back above its 200 DMA. For me, re-equitzing would be gradual because it could obviously go above the 200 DMA for a few days and then go back under making for a real fakeout. In the past some have posited that the 50 DMA crossing over the 200 DMA in either direction might be a more accurate trigger point for getting defensive or re-equitizing, depending on the direction. That might indeed be a better way to go. For this cycle I will stick with 200 DMA and between the end of the current bear, regardless of when that is, and the start of the next bear market I'll try to figure out if I think the crossover is the better mousetrap. The bigger macro for me is having an objective point where to go on defense and then a point where to re-equitize. The goal has been simply to miss a big chunk of down a lot. If the specific tactic turns out to be the best strategy that's great but it far from the priority. BTW the chart covers the first quarter of 2002. The S&P 500 was about 34% lower four months later. [ABSTRACT FROM PUBLISHER]

The quest for where and when a bottom seems to be a big topic on The Network these days. It seems like most of the guests are trying to figure out how to answer the question without telling the interviewer that it isn't such a great question four months from a top (but maybe I am just projecting my own beliefs on to these other people). I mentioned a few times my belief that every aspect of this bear market has been very textbook so far so maybe the rest of it will be textbook too. If so then we can expect quite a few more months and maybe another 10-15% down. Obviously if you think it will be worse than textbook my time horizon and percentages will not jibe with your thoughts. I would say that if in June or July the SPX is 25% from its high (boy that really would be sticking to the book) I would be inclined to put on more equity exposure. The way I am positioned now that could mean selling some double short, buying some stock or both. I am not talking about going 100% invested on one day but taking one step in the direction of less defensive. Another tool for me (and maybe you have something similar you rely on) is the 200 DMA. The market is way below its 200 DMA ( a sign of unhealthy demand) and the 200 DMA has started downward. At some point in the future the SPX will cross above which probably means healthier demand and probably another reason for less defense. Note this requires no accurate predictions. If we are down by 25%-30% that would make it easier to justify wading back in, ditto when we the market goes above the 200 DMA. These things could happen next month and then the month after or some point far into the future. There is no need to be right about when. If things do not play out so simply a plan B will need to be thought up. I have a couple of ideas which I'll write about in a future post. The picture looks like it could be in New Zealand but it is the snow covered volcano on the big island. That is a lot of snow up there. [ABSTRACT FROM PUBLISHER]

First there have been some great comments left in the last couple of days but unfortunately I probably can't reply to as many as I would like because of the travel and needing to still do my job while I am here. "Money never sleeps." GG circa 1987. But a couple... one reader asked asked about trying to win the falling knife dance with the financials. Well, I don't know the answer of when the bottom will come. I do know that a normal yield curve (for now parts of it are kind of normal and other parts not so much) creates a fundamentally sound back drop for the financials to conduct business. Normalization could come before, at or after the bottom, I don't know. One aspect of this entire saga that is a little bigger picture is the normal nature of cyclicality. In asking when on anything you need to first ask yourself whether you think this is a bear market, recession or worse. I am not in the worse camp but your answer here is crucial. If you think bear market or recession then you need to know that the process of bottoming takes close to a year and occasionally longer. Long time reader SLMasker shared going through a period of second guess in the last few days. I don't think she was beating herself up, I took the comment as more of a cathartic lament but either way this is a period where mistakes are common; no one is immune. The best remedy is to avoid big bets. The double short fund has served as a great tool (for me anyway) but 25% of great is an enormous bet, conversely 100% moved in during the last couple of days guessing at a bottom is a different kind of enormous bet. Just be patient. [ABSTRACT FROM PUBLISHER]

That was some wild ride in the market yesterday. The type of crazy up and down we have seen in the market this month has been getting crazier, the VIX closing at 29.02 notwithstanding, which I take as symptomatic of a bear market...along with lots of other things. I have disclosed some of the luck I have had over the last few months in the portfolio so it is right to disclose that the last couple of days I have lagged noticeably, due mostly (well I think mostly, anyway) to the pasting taken in the foreign markets plus dollar appreciation. Additionally the names I own that are higher beta (which includes a couple of foreign stocks) have also been pasted. Obviously lagging for two days means nothing but it is a microcosm for longer periods of time. I say this a lot but it bears repeating that a normal money manager, and also individual investor, will have periods where they beat the market and periods where they lag. Lagging now and then, at a minimum, is part of the equation, it goes with the work. I posted before about mentally preparing for a bear market, well you should mentally prepare to lag the market as well. I don't sweat lagging the market as I know it will happen now and then if not more. From where I sit if I can smooth out the ride when there is turmoil I will be quite pleased. Hopefully I am conveying a lack of emotion after a couple of relatively poor days the same way I do after a couple of good days. I took a little more action yesterday during the last hour (you know, the most important hour of the day) yesterday. I went back into the double short ETF with about 40 minutes to go at a price of $65 (I sold at the open on Tuesday at $71.35) and I also sold an industrial stock with a little more beta that quite a few, but not all, clients owned. I will say I went back in quicker than I expected but I am convinced this is a bear market and I would rather be wrong in the direction of lagging a rally. [ABSTRACT FROM PUBLISHER]

At the open today I sold all of the double short ETF I own for clients. Actually I hit the button four minutes in. For the first hour it looks ok but the thought process is a little different than that. I decided over the weekend (before Asia opened on Sunday night) that I would sell SDS if there was a down open on Tuesday. When markets go in one direction for so long with such emotion they tend to correct back one way or another. If the move turns out to be wrong the sale takes me to 20-25% cash for most clients. That sort of cash position riding down more decline gives a good chance for me to continue the streak of going down less but clearly if we plummet from here it would have been better to hold the SDS. A common thread to action taken at points like this is that there may be discomfort with these moves. That is just how it works. The reason I did not post this a little earlier is that I obviously cannot front run what I do for clients. The trade is long since executed and if there were any issues with it they should have arisen by now so I am able to disclose. For long time readers I doubt this trade is a surprise. [ABSTRACT FROM PUBLISHER]

No video this week. This chart is a YTD comparing SPY to the healthcare stocks I own for clients. The names are irrelevant and I doubt these names are any better, collectively, than any other six healthcare stocks. This strikes me as more of a confirmation, or if you prefer an uh-oh , of what more and more people are coming around to; that the chance that a bear market has started is much greater than it was a couple of months ago. Obviously I believe a bear has started but that could still turn out to be wrong. I also looked at a chart comparing SPY to a couple of tobacco stocks and a food stock and SPY lagged them too. Two weeks of this sort of rotation either matters or it doesn't but if it does it is consistent with the type of rotation that usually happens at a time of fear about the economy. Conversely four out of five of the industrials I own for most clients are lagging the SPY YTD. Again, nothing out of the ordinary there. In trying to navigate what might be a bear market it doesn't matter that the industrial stocks I, or more importantly you, have are down what matters is how much industrial exposure you have. This is not a time for an overweight exposure, at least I don't think it is. The cyclical nature of sectors is a pretty reliable over time. It may not work every time which is why my focus is on overweighting versus underweighting as opposed to zeroing out a sector. This is not the easiest thing to get a hold of but stocks go down in a bear market. Finding the ones that that will somehow go up is difficult to do. So if you can realize that the stocks you own will go down in a bear market you can then focus on cutting back overall exposure as opposed to finding the equivalent of the tech stock that went up in 2001. The obvious question that always comes to these types of posts why not get completely out. I think this is a huge bet. A couple of bets actually. One is you are betting that it really is a bear market. Another bet you are making is that you will know when it is over and so will know when to get back in. It is these turning points in the market where crucial mistakes are made. Avoiding extreme bets in either direction takes this type of mistake off the table. From the always planning ahead file Todd Harrison (with a hat tip to Charles Kirk ) is predicting that there will be a one week 10% drop at some point during 2008. That sort of narrow prediction is way outside my wheelhouse but if he is right that would cause a lot a fear, probably set the stage for a very fast and big snap back, even in the context of a bear market, and so I expect I would come out of my double short position if just for a couple of weeks. [ABSTRACT FROM PUBLISHER]

As my thoughts about things like toll roads and other lowly correlated assets evolve I thought it might make sense to shed a little more light on why I am thinking about this stuff more, what realistically can be expected from these types of assets and more importantly what not to expect. It's no secret that I think a bear market has already started as a function of excess gone bad in the financial sector. Regardless of whether a bear market has started or not, the fact is we have had bear markets in the past. The come, the market drops, they go and the market goes back up. This will be the fate of the next one whenever that might be. It's like going to the dentist. You don't want to have to endure sitting in the chair but you pretty much know what you are going to get. From this standpoint bear markets do not really threaten you financially (of course bad asset allocation is a different story). You pretty much know what you're gonna get and if you can add any value during a bear market, all the better. A bigger issue than a bear market that looms is the threat of returns below average after the bear market. Regardless of anyone's emotional state a repeat of the past is not to be feared, it is to be endured. Once endured I think we may be in for a period of returns that are noticeably below normal for an extended period which could be a new thing. This would disrupt a lot of financial plans. I am thinking something like US markets averaging 5% per year instead of 10%. It might sound benign but it isn't. Things like toll roads and plane leasing companies, as I mentioned the other day, have complex financial structures. There is a management of leverage and interest rates that is potentially more important that operating the tolls or contracting out the planes. Its kind of like car dealers. I've heard that selling the cars isn't as important as how they manage their interest rate risk. Whether that is true or not crisis, like we have had this summer in the financial sector, creates either real or perceived problems for financially intricate companies like some toll roads and some plane leasing companies. Since I think the bear market started with financial companies it seems logical to me that the toll roads and plane leasing companies may not offer as much bear market protection as we would like. But I am not worried about the bear market I am focused on what might come afterwards; returns that are below the historical norm. That is where I think moderate exposure spread over disparate market segments that might yield 6-7% and go up in price 3-4% becomes very important. To this point all four plane leasing stocks that I am aware of are down 20-26% in the last three months. This does not make them bad stocks, it makes this the wrong time. I don't own any now but will be a buyer at some point (might not be for a couple of years) at a 2% weight. Anyone who bought three months ago at a 2 or 3% weight may not be happy with the purchase but they have not permanently damaged their portfolio either. I believe the plane leasing space is a valid concept but it can, obviously be cyclical. The last few months have simply been the wrong time in the cycle. Getting the cycle wrong with too much of your portfolio becomes a real danger and all of these themes strike me as having the potential to end up being over owned. For anyone who cares the context here is my trying to think about what comes after the bear market. If you have been reading this site for the last couple of years, or longer, you know that I was planning a strategy for what I believe is the current bear way back then and I have been making small changes in that direction (buying the double short, making the occasional sale and reducing the size of some bigger winners) for a while now. The idea of waking up one day and saying a bear market is here I better do something seems crazy to me for anyone employing any sort of active strategy. Similarly waking up one day in 2010 and... [ABSTRACT FROM PUBLISHER]

Every once in a while when things are starting to turn a tad uglier I like to post a reminder about how normal market declines are. Corrections and bear markets come along every so often, the market endures it and then works higher. Regardless of what is happening now (my take has been that we are early in a bear market) at some point the market stops going down and will start higher. Over the long term the stock market averages close to 10% per year which includes bear market declines. Declines followed by recoveries and new highs is just how it works. It may take longer than you would like, but it does happen. Embracing this simple truism should reduce the emotional toll that declines take. Personally I have unyielding faith that cycles are normal, they tend to end in a similar manner, start in a similar manner and doing a few simple things within a portfolio can help buffer the impact. Obviously there is no guarantee and there people who should not attempt to take defensive action. I have been writing about some of these basics for months as I have implemented them. One thing that is true, I have tried to make this point countless times, is that if is turning out to be a bear market it is happening slowly. For now the market topped out two months ago, with the decline thus far still in the realm of down a little it is not too late to take defensive action if that is appropriate. Over the last few months or so I have reduced volatility by selling and reducing a couple names, added a little double short here and there and tilted toward sectors that tend to do better, like staples, in recession or bear market. I also write often about moderation which applied to being defensive too. I think 100% cash is a very aggressive position. Just as bear markets tend to start the same they also tend to end the same. Whether this is just a dip or really is a bear market there will be a fast and furious rally and if you are 100% cash (or some other extreme number) you are in a situation where you have to correctly guess when that comes which is not a bet I want to make. Lagging a monster rally while erring on the side of caution is not a problem like missing a monster rally is. On a much more important note, Prescott (the town where I live) is getting its second pro sports team. Last winter we got minor league hockey and this spring we are getting an indoor football team, the Arizona Adrenaline. [ABSTRACT FROM PUBLISHER]

When he's not clothing the naked natives of Bantu Besh with the pygmy pullover Jay Peterman might be taking defensive action in his portfolio. But in case he isn't I am. I increased the double short yesterday with about 83 seconds left in the trading session. The trade added 30% to the existing position. I am convinced that the market has started to turn down into a bear. One thing is clear the action thus far in the market has been a rolling over. The variable of course is whether this really is the start of a bear or just a run of the mill dip. I've spelled out my logic before; inverted curves lead to recessions most of the time, the decline in the dollar is a sign of something being wrong, the mortgage/liquidity/credit crunch is a big bad event with serious repercussions, the market being below its 200 DMA is something that I view as a signal that demand for stocks is weak and if this has been a cyclical bull it has been very long by historical standards. If this thinking turns out to be correct then the decline will take several months and it will make sense to look progressively less like the index. Over the last few months I have made a few tweaks in this direction, and blogged about them as I went, which have created the desired effect of pulling away from the benchmark. If this thinking turns out to be wrong and the market rockets higher I would expect to lag but still participate. Given where I am now I don't view this as a real problem. Every time I disclose this sort of action I always say that lagging a huge move up is not a problem but missing one is which is why I move in such small steps. [ABSTRACT FROM PUBLISHER]

A reader asked me to clarify my comments from this last video about possibly allocating more to absolute return if I think a bear market is imminent as opposed to normal benchmarking done by investment managers. The answer has many facets and this may turn out to be difficult to articulate. The way I view benchmarking, I am trying to add value versus the benchmark we use (the S&P 500 for equities). At times like when the market is going up a lot it makes sense to look a lot like the index and not worry about adding value. This is a point I have made before. The next time the stock market is up 26%, as it was in 2003, going up by 24% is a great result for helping you reach your financial goals. The next time the market goes down by 26%, this is a normal bear market drop which is a point I have made many times and I see John Hussman mentioned it in his commentary dated Nov 12, it makes sense to look very little like the market. The obvious dilemma is knowing when the market will do either of those things. As it is not knowable big bets become very risky. A point I have made before is it does not take much to change the behavior of a portfolio. My preference would be to sell as little as possible in the face of a bear market, rather I would prefer to simply neutralize as much of the decline as possible. In practice this means selling a little and adding in some more double short which I have been very glad to own these last few months. Additionally, adding in a couple more absolute return products, or as I have sometimes referred to them in their own world products that might go up 3-5% and pay out 4-6% or otherwise move independently of the stock market could also help offset declines. I have some cash raised to do this. I have no expectation of being down zero during the next 30% decline regardless of when it comes. Miss a chunk or smooth it some out are a couple of phrases that describe what I would hope to do and the things I have done far have helped thus far. To reiterate a point from before certain stocks going down a lot in a bear market would not be the concern, especially if they pay good dividends that are safe from being cut. My concern is with the overall mix. If someone could guarantee you that a portfolio of ten stocks would be up 30% (compared to 20% for the market) but that one of the stocks would drop 80% (and you couldn't know which one), would you care about the one that dropped 80%? If your answer is yes then my ideas are not right for you. Again the idea is to add value which during a bear market is to protect that bottom number on the position page as much as possible. As I think the odds of a bear have now increased I am more focused on protection and defense as I think about what's next and at some point the focus will shift to looking more like the index and going more on offense. [ABSTRACT FROM PUBLISHER]

...The Interweb isn't quite up to speed at the ol' Nusbaum hut I am posting this from the Honolulu airport. The market had another bad day but I see that INTC and YHOO are up big after hours on earnings but IBM is down a little (thanks for the reminder Leisa!). I did not read the reports but the trading tells me a lot given that I don't own any of the three. Every sector ETF to the lower right on this page was down. In the portfolio it looks like utilities, Norway and one stock I have from Spain for a lot of clients were the only things that did well, oh and the double short. Gold was down and the dollar was up against everything but the yen and maybe ISK. I am guessing that INTC and YHOO would be enough for stocks to start higher tomorrow but we'll see. I had a thought on the plane about patience as it relates to a portfolio you might care about. I have been pleased with my year so far. But when the current quarter started I lagged for a few days and I thought well ok well that's the deal for now. The amount that I lagged by was small and the trend has now reversed. The point is that over the course of just a few days, and this applies to longer periods of time, a lot of the fundamentals of the themes you care about are not going to change a whole lot. For me things like oil, emerging markets (in moderation), some of the countries I believe in are all multi year themes. Periods of lagging will happen but I do think they are the right place to be. If you have done your homework on the themes you care about and you then lag for a few months with reasonable allocations to those themes, remain patient. One observation to share from the thing I spoke at yesterday was the the audience seemed eager to learn. I believe most of the folks were in the business in one capacity or another (but I can't be certain) and despite how boring we all must have been the audience seemed engaged and questions were asked. People who manage money are in the same boat as people who do not manage money; they have more to learn. Learning more is one of the reasons I do what I do. The challenge of learning new things combined navigating current events makes it exciting for me and perhaps intellectually stimulating for you? Or I am just a big nerd. [ABSTRACT FROM PUBLISHER]

Ben Stein often mentions getting a dog, he is exactly right. Anyhoo a reader left a question yesterday about volatility of broad-based ETFs. He has observed that they seem to be as volatile as individual stocks. He likes the idea of reducing volatility but maybe is unsure whether ETFs actually do reduce volatility. I don't think I agree with the general nature of his sentiment that broad-based products are as volatile as he thinks but that is his perception so it becomes his reality. Obviously there are some stocks that are less volatile than the index to which they belong and also this summer has generally been more volatile than most of the last few years. That fairly obvious answer aside the question drifts into portfolio construction. I write a lot about increasing or reducing volatility, I am talking about the entire portfolio not the individual components. I do not know the mindset of the person leaving the question but it is common for people to focus on the volatility of the individual holdings as opposed to the volatility of the overall portfolio. Most of the accounts I manage have 40-45 holdings. There are two reasons why they will not all go up all the time. One reason is that if the do all go up together I would expect they will all go down together (the context here is weeks not on a given day). Secondly, if you buy 40 stocks it is not realistic to expect you will be right about all 40. The sooner you can recognize an actual mistake and get rid of it the better but not every stock that goes down is a mistake. Back to financials; I expected the group to lag for reasons I have spelled out many times already. So this sector becomes a place to reduce volatility so maybe that means no small caps, no investment banks and no exchanges. Not having those three sub-sectors allowed for less volatility than I might have otherwise had . Materials is a sector that I have expected to do well and so adding some volatility seems like a reasonable idea, which is what I have done (this has been disclosed many times as well). Believing we are close to the end of the cycle and that the chance for corrections is a little higher than normal I have taken steps to reduce the overall volatility even if some of the things I own are volatile. I have a little more cash than normal, I have favored dividends and I maintain a position in the double short fund. In addition to stock selection, these are tools to manage volatility. The summer was a wild ride but the things outlined here (really what I have been writing about all summer) allowed clients to have a much smoother ride and luckily the places where I do have volatility have had a nice snapback effect (that I have also written about many times), I will detail performance in this weekend's video. One of the reasons I specifically do not favor broad-based products is because of the fine tuning that is possible with narrower products. As TomK mentioned the other day not everyone has the time to construct a portfolio with so many moving parts--very fair point. An assumption I have made many times before is that the people who are inclined to seek out a blog for stock market commentary are generally more able/likely to spend enough time to come up with more than 80% SPY and 20% EFA. [ABSTRACT FROM PUBLISHER]

We had some interesting comments come in on the last couple of posts that are worth mentioning. "I am losing my shirt in this market, down over 3% on the year and not happy. I was up 12% just a few months ago." One or two other people jumped on this guy saying he isn't diversified and the like. There is nothing wrong with big bets, un-diversified portfolios and risk taking, it may not be right for a lot of people (me included) but it is right for some people. The thing is not that you shouldn't invest they way we assume this one reader is but understanding that big swings will accompany this approach. Whatever it was that put this guy up 12% and then took him down 15% from his high will take him back up ahead of the market at some point. Does anyone doubt this? Big swings go hand in hand with big risks. Even if you aren't that experienced I would think this would be common knowledge. Where I think this person runs into trouble is with the emotion I think he is expressing. Whether he intends it or not, and I think he does, he is living by the sword. You know how the rest goes. "Screw being well diversified, I want my portfolio to go up and not sideways for ten years because I was too diversified. " He goes on to stress the importance of beating the market and that diversification prevents that. Ok well I do believe in diversification. If you read the comment his is very preoccupied with beating the market but the what I infer is that he is very focused on the near term. What is more important, being ahead of the market YTD or beating it over some longer period of time that actually ties in with what you are saving for. Quick, did you beat the market or lag it in 1998 and how has that impacted your life since? In expressing concern about his portfolio going sideways for ten years because of being diversified; well sideways for ten years happens every few deca des, that's just how the market works but outside of those rare occasions, and they are rare, just being in is the most important thing. After watching this week's video a reader left this, "Thanks Roger but I need some good stock picks to get my portfolio out of the red." Well aside from the fact that this site isn't really about stock tips I have talked about several things over the last year (repeated them too often, probably) that could have helped overall. I have been writing about being underweight financials, shaving emerging markets periodically back to equal weight, generally increasing yield, reducing volatility, buying foreign currency ETFs, being underweight discretionary, being heavy in foreign stocks, adding in some double short fund and warning about the inverted yield curve. I have been very transparent with all of these things and they have, combined with some luck, made the ride smoother at the time it has needed to be. This site chronicles my ideas about how to catch fish, if you take my meaning. Further, if you are worried about being in the red then it makes sense to think about how to mitigate that before it happens and while it can happen at any time for any reason, late in the cycle with an inverted curve is probably a good time bring it down a tick, as I have been saying for I don't know how long now. The picture is from Molokai. [ABSTRACT FROM PUBLISHER]

Long time readers might recognize this chart I use in my technical study as this is what stocks did on Tuesday. I had a post on RealMoney yesterday in which I said that the panic is over but that the event is not. The market then got whacked. I tend to think that the panic is in fact over and what is happening now is the discounting of how serious this will or will not be. I mentioned over the weekend that no more selling made no sense to me. That such a big threat could resolve itself in a couple of weeks just seemed wrong, still does. Based on a couple of the comments yesterday the panic may NOT be over. This is subjective of course but I think the panic of early August was the discovery of the problem. Now that it has been discovered it needs to resolve over time. Generally speaking I have thought the worst case scenario from this would be a normal bear market and while I have been less vocal about a normal recession this wouldn't be shocking either. Regarding the Bespoke table from yesterday a reader asked "How do you time your over weighting or under weighting of a sector? Why do you think it is reasonable to time sectors, but not time the market?" It depends how you use the word time . As a means of short term trading I don't think it is ideal for managing other people's money (this is my perception only and I am not saying what other people should do) and I am not that good at it. In terms of following the economic and stock market cycle, recognizing when sector weights seem to be out of balance--these are very long term things. I have had roughly the same underweight in financials for several years. When the yield curve normalizes I will be closer to equal weight. Is that timing? In a way yes and in a way no. My focus in the regard involves infrequent need for big change, trying to add value if possible and smooth out the ride a little. This is right for me, it is ok if it is not right for you. Another reader asks "Why am I in this market when a risk free internet bank pays 5.5%????" When do you need to use the money? In that time frame what do you expect will be the better hold; a diversified portfolio or a money market. Whatever you answer is what you should own. If you want stocks you need to realize that at this point the market is well within down a little . Yet another question asks "do you get more bearish as we cross below the 200 dma for a second time?" I don't think of it that way, but maybe I should. Right now the portfolio is behaving as I hoped. Generally accounts are going down a little less than the market so as we grind around in this same area I don't see a need to add more double short (this can change at any time). The real thing here, and I think most clients get it, is trying to use the tools to try to protect against down a lot. It is helping out for now but time will tell what I do next; I will share whatever that is. And because Adam asked, Boomah! Speaking of Adam, read this if you have not already done so. [ABSTRACT FROM PUBLISHER]

Jeremy Grantham is quoted in this Marketwatch article saying the S&P 500 could lose 40% between late 2008 and the end of 2010.We may all be as mad as this guy if he is correct.It certainly seems reasonable that we could at least have to endure a normal bear market at some point between now and then but cutting in half, or coming close to it, twice in a decade is pretty far outside the fat tail.However any scenario is possible and it makes sense to have at least a rough idea of what you would do if Grantham turns out to be correct.A move of 40% over a period of 18 months or more (the time period implied in his statement) is sort of a slow decline. The kind of decline that many people will tell us not to worry about as we go. To frame this in the way I write about it (and think about it too) is that on the way to the down a lot he calls for is the the down a little that happens every now and then.Any time the market goes down a little it could be on its way to down a lot. This does not happen very often but slow declines that result in down a lot hit down a little first. In this context sticking to whatever get-defensive strategy you believe in becomes of paramount importance.An important point to remember is that if the market does actually go down 40% and you do a great job in protecting against most of it, you will still endure a decline of some magnitude--again, if you navigate this scenario fantastically well. Most of us, if we are lucky, will be down a lot but hopefully less than 40%. A 25-30% decline in a down 40% world would be a colossal success in my opinion.That may not sound great to you but the average 10% annual gain includes all of the worst bear markets in history. Adding ten percentage points of outperformance in a one or two year period would be huge to your long term result.I would suspect that in a slower decline, that is one without panic, diversification would work, that correlation would not go up between investments where it is usually low. In this environment I would want to own foreign currency and bonds, different sorts of countries (commodity based, surplus or in their own world), cash and big cap defensive stocks all come to mind as places to overweight. I would also hope that I had positioned the double short fund well going into this to neutralize some of that decline.I have no idea if Grantham will be right and there is really not much need to correctly predict something like that either. Any time the market goes down a little (not the market condition to fear) it could devolve into down a lot (this is the thing to worry about). You can't know when it will happen so don't sweat being right, just stay disciplined and and hope to miss a chunk of it.The picture is of Adam Arkin playing his recurring character of Adam in my all time favorite TV show; Northern Exposure. [ABSTRACT FROM PUBLISHER]

The S&P 500 is flirting with its 200 DMA which is an important indicator for me. While I say that the market breaching its 200 DMA is the trigger point for me to take some defensive action it is actually the day after it closes below its 200 DMA, if that next day is a down day. If we are down toward the close on the day after I will take some action. For this go around I am still mulling between the sale of one stock, adding to my double short fund or both. I spent the last couple of days lining up my ducks so that I'll be ready if I need to be but maybe that I spent a couple hours preparing means it won't happen (insert nervous smile). So to be clear the changes I might make at first would be simply a tweak. If, as has been the case the last couple of times this turns out to be a non-event I won't miss a rally, I would just lag a little. Invariably someone will call me an idiot for being wrong about this but I hope I am wrong. I am trying to protect against something that I hope never comes but realistically only comes along once or twice a decade. If this turns out to be wrong I think the reason why might tie in with something Helene Meisler wrote about on RealMoney early on Wednesday morning . To paraphrase; she said that the market going below its 200 DMA is far less likely to be important if the 200 DMA is still rising, which it is. She says that a breach is much more important if the 200 DMA is falling. This is helpful. For now I am not changing my plan. I'll take action as described above if I need to. Then depending on what happens next I will either reduce long exposure more or increase it back if the market takes back the 200 DMA and can keep it for a few days. If I end up being wrong and having to increase net long exposure in a week or two, we are talking about 2-4 trades in total for accounts with 40-45 positions. The important thing is being disciplined without creating undue turmoil in accounts and making sure clients are not too leveraged to one single outcome. [ABSTRACT FROM PUBLISHER]

There is a great article up at Index Universe written by William Bernstein about whether the ETF market place is on its way to being a bubble. As I read the article we are not there now but there is visibility for a bubble. In the post Bernstein shares part of an email from Jim Wiandt in which the two enjoyed a chuckle over some of the funds that were then in the pipeline; "a 'Dynamic Brand-Name Products Portfolio,' an Inverse Materials ETF, a Healthy Lifestyle fund, an Ellioit Wave ETF, a Georgia (the state) ETF and, my favorite, an 'Ultra-Short S&P 400 MidCap 400 Citigroup Growth' ETF." I believe there is a typo in the word Ellioit above but I pasted the quote in and chose to leave it as I pasted it. No doubt there have been a lot of ETFs listed that on the surface seem questionable. Some of those however do offer some tangible benefit as a secondary effect or maybe something else. I would also add that I think the short and double short ETFs are targeted more for professionals than individuals; the focus of the Bernstein article, as I read it, is the effect of these funds on individuals. The article mentions the incredibly narrow HealthShares fund. I wrote about these for the Street.com a while back and did spell out a possible use for them in a small proportion but I don't use any personally or for clients. Bernstein wonders whether in the future the market for these funds could be pushed around in such a manner that the ETF structure effectively breaks down. If he is right then yes, holders of these funds would be hurt. He gets a laugh from the Georgia Fund that is in the works; there are funds from a lot of states that could list like the California Fund and the Colorado Fund as other examples. I am unlikely to try to take anyone to the hole in defending this concept but the Georgia Fund, what do you think that will be? Anyone else besides me think it will have 15-20% each in Coca Cola (KO) and Home Depot (HD)? If correct the fund may still be useless but hardly a concoction of evil intended to separate unsuspecting mom and pops from their money either. I think a more realistic take is that a lot of funds that have liste d or will list soon will close up shop after three or four years with only $30 million invested regardless of performance. This is a point I have made several times in the past. [ABSTRACT FROM PUBLISHER]