Being a buy side investor in a sellers market is a difficult proposition. Investing in any stock or market sector is a daunting task without some type of downside protection. Or, if your just looking to profit from further market decline and you do not have the margin to sell short, here are a few downside reccomendations.
DOG- The DOG can be purchased to replicate the inverse of the Dow Jones Industrial Average. Take the monthly/yearly chart of the DJIA and flip it over and you have the chart of the DOG, a very profitable proposition over the past several months. The Dog can be used as a great downside hedge/protection in junction with a small alloaction of individual stocks.
QID- Like the DOG the QID can be purchased to replicate the inverse of the NASDAQ Composite and offers all the same downside protection as the DOG. Have a portfolio of Technology stocks you would like insurance on, the QID is a profitable way to hedge against losses
VIX- The Chicago Board Options Exchange Volatility Index (VIX) is a gauge that measures the anxiety of the market. When anxiety in the market is high, the VIX is high, and when the market is complacent, the VIX is low. The VIX can be bought and sold just like any other equity but reccomended to do so only for the active trader. Buyers of the VIX are afforded protection against large market downturns because the VIX rises as stocks fall.
There are also a surplus of reverse ETF's that are available for purchase that allow you to single out a specific area of the market. Reverse ETF's exist for the Banking/Finance Sector, Technology, Energy, and so on and are a great way to hedge a portfolio to the downside. Google Search: Reverse ETF's for suggestions.
Tuesday, June 24, 2008
Wednesday, June 18, 2008
Economic Outlook: Bearish 6/18/08
DJIA: 12,029
S&P: 1,337
NASDAQ: 2,429
In order to invest in this market one must try to gauge the direction of it. Although current market levels appear low and equities appear cheap compared to July-August highs, I believe the direction of the market continues downward for the intermediate future (6-8 months) and that investors like myself must remain patient for opportunites to present themselves. For the mean time I will be keeping the majority of my portfolio in either cash or within short term trading ranges i.e stop gain/loss orders. And the reasonings behind my beliefs are as follows...
1. Today 6/18/08, Economic Bellweather Fedex missed analyst expectations and issued lower guidance through 2009 citing higher fuel costs as a major hinderance on profits. When the distinguished straight shooting management from Fedex speaks the street listens. What this means: if high fuel costs are showing up in the balance sheets of Fedex they will shortly be showing up almost everywhere else.
- On a side note I heard the apprehension on the state of the economony from the CEO of Fedex himself, Frederick Smith, firsthand as he delivered the commencement address to Penn States SMEAL College of Business class of 08'
2. Follow the "smart" money. As in my previous post about the 20 tips, it is easy to become distracted by the talking heads on television who are often swayed in their opinions by those writing their paychecks. "Smart" money is hedge fund manager John Paulson, http://online.wsj.com/public/article/SB120036645057290423.html, who made Billions of dollars over this past year as he shorted positions in the credit markets and financial stocks that payed off dearly as the Housing Market unraveled. Today, Paulson remains short the credit markets and will avoid equities as the U.S consumer gets squeezed forcing the U.S economy into a prolonged recession.
-An excerpt from Economist Nouriel Roubini will follow suit...
3. The Triple Whammy: Higher Inflation in the form of Food & Energy prices, Rising Unemployment (4.5%), and continuing weakness of the USD are all working in unison to curb the purchasing power of the American Consumer. Market pundits and analysts continue to preach that the worst of the credit crisis is behind us. The only thing that will be shortly behind us are the band-aid like government stimulus checks designed to pump up the consumer. With gasoline at a national record of 4.08 a gallon the only thing getting pumped is the gas into our cars.
4. Investor Sentiment is low, Bulls seem to have run out of steam, buy the dips and sell the rallies has been hearsay the last month. Value investors will always remain in markets providing temporary relief and support when needed. They have 2 luxuries that I lack at the moment, millions of dollars and a 3-5 year time frame although I am working on achieving both. Besides the fact that equity prices look relatively cheap compared to recent levels I cannot foresee any catalyst but one to spark the next bull market. Fact: GDP is slowing, unemployment is rising, inflation is higher than the Fed's comfort level, Mortgage defaults continue, extension of credit tightening, and the value/direction of the USD is stagnant. All in combination should pull down the projected earnings forecast of equities across the board. Analyst projections for $130-140 bbl place many U.S Airline Carriers back into bankruptcy circa 2001. If sustained the question will be when not if the first will fail.
-I believe the only catalyst worthy of reversing this trend is a reversal in the price of oil, if it in fact does reverse course than a prolonged recession may be avoided.
In conclusion, how much lower do we have to go? I have no idea but I will leave you with Bob Janjuah's, credit strategist at RBS, prediction that the S&P may have another 300 points to the downside and the DOW below 11,000.
My next post will map out a strategy for a buy side investor like myself to take advantage and make gains in this market in line with this stated projection.
S&P: 1,337
NASDAQ: 2,429
In order to invest in this market one must try to gauge the direction of it. Although current market levels appear low and equities appear cheap compared to July-August highs, I believe the direction of the market continues downward for the intermediate future (6-8 months) and that investors like myself must remain patient for opportunites to present themselves. For the mean time I will be keeping the majority of my portfolio in either cash or within short term trading ranges i.e stop gain/loss orders. And the reasonings behind my beliefs are as follows...
1. Today 6/18/08, Economic Bellweather Fedex missed analyst expectations and issued lower guidance through 2009 citing higher fuel costs as a major hinderance on profits. When the distinguished straight shooting management from Fedex speaks the street listens. What this means: if high fuel costs are showing up in the balance sheets of Fedex they will shortly be showing up almost everywhere else.
- On a side note I heard the apprehension on the state of the economony from the CEO of Fedex himself, Frederick Smith, firsthand as he delivered the commencement address to Penn States SMEAL College of Business class of 08'
2. Follow the "smart" money. As in my previous post about the 20 tips, it is easy to become distracted by the talking heads on television who are often swayed in their opinions by those writing their paychecks. "Smart" money is hedge fund manager John Paulson, http://online.wsj.com/public/article/SB120036645057290423.html, who made Billions of dollars over this past year as he shorted positions in the credit markets and financial stocks that payed off dearly as the Housing Market unraveled. Today, Paulson remains short the credit markets and will avoid equities as the U.S consumer gets squeezed forcing the U.S economy into a prolonged recession.
-An excerpt from Economist Nouriel Roubini will follow suit...
3. The Triple Whammy: Higher Inflation in the form of Food & Energy prices, Rising Unemployment (4.5%), and continuing weakness of the USD are all working in unison to curb the purchasing power of the American Consumer. Market pundits and analysts continue to preach that the worst of the credit crisis is behind us. The only thing that will be shortly behind us are the band-aid like government stimulus checks designed to pump up the consumer. With gasoline at a national record of 4.08 a gallon the only thing getting pumped is the gas into our cars.
4. Investor Sentiment is low, Bulls seem to have run out of steam, buy the dips and sell the rallies has been hearsay the last month. Value investors will always remain in markets providing temporary relief and support when needed. They have 2 luxuries that I lack at the moment, millions of dollars and a 3-5 year time frame although I am working on achieving both. Besides the fact that equity prices look relatively cheap compared to recent levels I cannot foresee any catalyst but one to spark the next bull market. Fact: GDP is slowing, unemployment is rising, inflation is higher than the Fed's comfort level, Mortgage defaults continue, extension of credit tightening, and the value/direction of the USD is stagnant. All in combination should pull down the projected earnings forecast of equities across the board. Analyst projections for $130-140 bbl place many U.S Airline Carriers back into bankruptcy circa 2001. If sustained the question will be when not if the first will fail.
-I believe the only catalyst worthy of reversing this trend is a reversal in the price of oil, if it in fact does reverse course than a prolonged recession may be avoided.
In conclusion, how much lower do we have to go? I have no idea but I will leave you with Bob Janjuah's, credit strategist at RBS, prediction that the S&P may have another 300 points to the downside and the DOW below 11,000.
My next post will map out a strategy for a buy side investor like myself to take advantage and make gains in this market in line with this stated projection.
20 Tips For No-Nonsense Investing
I have been hanging onto this article for nearly two years now since I came across it in the WSJ, each time I go through my bag to clean it out I cannot seem to get myself to discard it, so why not make it the outline for my blog...A few of the bolder numbers are reminders to myself, but I believe all those who read these 20 tips from Jonathan Clements will surely benefit.
Twenty Tips for No- Nonsense Investing
Getting Going/ By Jonathan Clements, WSJ 02/19/06
1. You don’t have any friends on Wall Street. You may want to make money but so does the street. And the more the street makes, the less investors pocket. Get an attitude. Market Strategists, your brother in law Bob, the television talking heads and the local brokerage firm’s slick salesman all spew an endless stream of utter nonsense.
2. Your neighbors are delusional. They spend too much, they own investments they don’t understand and their overall portfolio isn’t fairing nearly as well as the one or two stocks the boast about.
3. Most stock mutual funds are laggards and it’s hard to find winners. Sure, there are funds with great 10 year records. But you can’t buy past performance.
4. There are no “magic” investments. Yes, investments enjoy brief surges of popularity and, for a few months or even years, they can seem like a sure thing. Think technology stocks in early 2000, hedge funds in 2003 and real-estate and energy stocks in 2005. But the magic never lasts. See a crowd gathering? Grab your cash and start running in the opposite direction.
5. You can control risk and investment costs, buy you cant control returns. So why do investors spend so little time on risk and costs and so much time on returns?
6. There’s no substitute for saving money. Next time you crack open your wallet, think on this: The dollars you spend today are delaying your retirement.
7. Sophistication is usually an excuse for Wall Street to charge fat fees. If you don’t understand an investment, don’t buy it. Most folks can do just fine with a handful of plain vanilla mutual funds, preferably market-tracking index funds.
8. Rich people often have more dollars than sense. Hedge funds? Venture-Captial Investments? Make no mistake: You have to be truly wealthy to afford the potential losses involved.
9. Your portfolio’s growth is driven, more than anything, by how much you save and by how much you divide your money between stocks and conservative investments.
10. If an investment is exciting it probably won’t be especially profitable. Investors love to buy hot growth companies, trade mutual funds and take a flier on an IPO. Before you join in on the fun, however, consider how much you might lose and how many paychecks it will take you to recoup.
11. Be leery of investment recommendations from commission salesman.
12. Land appreciates, houses depreciate. Like your car, your home sits out in the rain. You know your car is depreciating. Why should your home be any different? Keep that in mind the next time your neighbors tout the investment value of their new kitchen.
13. Sound Investment strategies don’t change with the news. By all means, read the personal finance magazine’s market prediction and listen to the television reporter’s breathless dispatch from the floor of the New York Stock Exchange. But for goodness sake, don’t act on this nonsense.
14. Your worst investment enemy is often found in the mirror. Even if you don’t get tripped up by Wall Street shenanigans or you’re some other foolish advice you could still end up with wretched returns if you chase hot investments or panic when the market declines.
15. Tax deductions are money losers. True, if you are in the 25% federal income tax bracket and you incur $1,000 of mortgage interest; you will save $250 in taxes. But the other $750 is coming out of your pocket.
16. Leverage Bites when you get it wrong. Most people wouldn’t dream of borrowing money to buy stocks. Yet, it’s considered prudent to borrow 90% of a homes purchase price. Most of the time, your leveraged real-estate bet will work out just fine. But cross your fingers and hope you don’t suddenly have to sell just as real-estate prices are sinking.
17. If financial forecasters are unanimous that stocks, or bonds, or the dollar are about to plummet, they almost certainly wont. The reason: presumably, these soothsayers and their clients have already acted on their prediction and thus it’s already reflected in current market prices.
18. Insurance is a necessary evil. When you buy insurance, you are paying somebody else to take on risk that you can’t afford to bear. Than can be a smart move. It will also cost you, however, so you shouldn’t buy more insurance than you really need.
19. You can’t get rich by spending money. The folks with the big house, fancy cars and designer clothes are, no doubt, loaded. But they may be loaded with debt.
20. Investment experts who promise market-beating returns deserve our profound skepticism After all, if they are so wise, why are they still working for a living? And if their investment ideas are likely to be so profitable, why are they sharing them with us?
Twenty Tips for No- Nonsense Investing
Getting Going/ By Jonathan Clements, WSJ 02/19/06
1. You don’t have any friends on Wall Street. You may want to make money but so does the street. And the more the street makes, the less investors pocket. Get an attitude. Market Strategists, your brother in law Bob, the television talking heads and the local brokerage firm’s slick salesman all spew an endless stream of utter nonsense.
2. Your neighbors are delusional. They spend too much, they own investments they don’t understand and their overall portfolio isn’t fairing nearly as well as the one or two stocks the boast about.
3. Most stock mutual funds are laggards and it’s hard to find winners. Sure, there are funds with great 10 year records. But you can’t buy past performance.
4. There are no “magic” investments. Yes, investments enjoy brief surges of popularity and, for a few months or even years, they can seem like a sure thing. Think technology stocks in early 2000, hedge funds in 2003 and real-estate and energy stocks in 2005. But the magic never lasts. See a crowd gathering? Grab your cash and start running in the opposite direction.
5. You can control risk and investment costs, buy you cant control returns. So why do investors spend so little time on risk and costs and so much time on returns?
6. There’s no substitute for saving money. Next time you crack open your wallet, think on this: The dollars you spend today are delaying your retirement.
7. Sophistication is usually an excuse for Wall Street to charge fat fees. If you don’t understand an investment, don’t buy it. Most folks can do just fine with a handful of plain vanilla mutual funds, preferably market-tracking index funds.
8. Rich people often have more dollars than sense. Hedge funds? Venture-Captial Investments? Make no mistake: You have to be truly wealthy to afford the potential losses involved.
9. Your portfolio’s growth is driven, more than anything, by how much you save and by how much you divide your money between stocks and conservative investments.
10. If an investment is exciting it probably won’t be especially profitable. Investors love to buy hot growth companies, trade mutual funds and take a flier on an IPO. Before you join in on the fun, however, consider how much you might lose and how many paychecks it will take you to recoup.
11. Be leery of investment recommendations from commission salesman.
12. Land appreciates, houses depreciate. Like your car, your home sits out in the rain. You know your car is depreciating. Why should your home be any different? Keep that in mind the next time your neighbors tout the investment value of their new kitchen.
13. Sound Investment strategies don’t change with the news. By all means, read the personal finance magazine’s market prediction and listen to the television reporter’s breathless dispatch from the floor of the New York Stock Exchange. But for goodness sake, don’t act on this nonsense.
14. Your worst investment enemy is often found in the mirror. Even if you don’t get tripped up by Wall Street shenanigans or you’re some other foolish advice you could still end up with wretched returns if you chase hot investments or panic when the market declines.
15. Tax deductions are money losers. True, if you are in the 25% federal income tax bracket and you incur $1,000 of mortgage interest; you will save $250 in taxes. But the other $750 is coming out of your pocket.
16. Leverage Bites when you get it wrong. Most people wouldn’t dream of borrowing money to buy stocks. Yet, it’s considered prudent to borrow 90% of a homes purchase price. Most of the time, your leveraged real-estate bet will work out just fine. But cross your fingers and hope you don’t suddenly have to sell just as real-estate prices are sinking.
17. If financial forecasters are unanimous that stocks, or bonds, or the dollar are about to plummet, they almost certainly wont. The reason: presumably, these soothsayers and their clients have already acted on their prediction and thus it’s already reflected in current market prices.
18. Insurance is a necessary evil. When you buy insurance, you are paying somebody else to take on risk that you can’t afford to bear. Than can be a smart move. It will also cost you, however, so you shouldn’t buy more insurance than you really need.
19. You can’t get rich by spending money. The folks with the big house, fancy cars and designer clothes are, no doubt, loaded. But they may be loaded with debt.
20. Investment experts who promise market-beating returns deserve our profound skepticism After all, if they are so wise, why are they still working for a living? And if their investment ideas are likely to be so profitable, why are they sharing them with us?
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