Invest Bearish As Your Government Shuts Down On You

 |  Includes: DIA, GE, GLD, PG, QQQ, SLV, SPA, WMT
by: Quoth the Raven

(Bonus Disclosure : I'm neither right or left wing.)

Introduction : Pop Quiz

The affordable care act passes through the three branches of government and is signed into law, but you don't agree with it. Do you:

A) Concede respectfully, realizing that sometimes life isn't fair, and that you're not always going to get what you want.

B) Legally propose amendments to the ACA in a way that is not going to negatively effect the American people and global economy.

C) Cry, carry on, and whine like petulant babies, avoid working through proper channels of government to change it, and refuse to pass a budget that will eventually lead to the shutdown of the entire government.

Did you guess "C"? If so, you could work for our Federal Government!

As if our elected officials haven't done enough to make things as difficult as possible for everyone all the time, they've gone and seemingly put a potential end to our bull market.

Sure, there's some good things that can come from a bearish market:

1. Companies that you've shorted due to fundamentals are likely to get dragged down through the macro-market dragnet, yielding you gains on your positions.

2. If you know how to position yourself correctly, you can make money in a down market just as easily as you can in a bull market.

The government is acting without regard for what the consequences are going to be for the markets not only domestically, but abroad. However, this comes as number "two" of a major "one-two" punch that the government has launched on the markets of recent. Here's two ways in which the government has pounded the market, resulting in me continuing to have a bearish outlook on the macro markets in the short term future.

Punch One - Bernanke Hanging Onto QE Too Long

Bernanke may have very well just knocked things even more "out of whack" with our current market by making his latest move in keeping QE going when everyone on Earth (myself included) thought that the Fed was going to start tapering.

I've written numerous articles over the past 6 months swearing up and down that the market is going to be coming to a bearish stance at some point soon, and that the bull market as we know it - although it's had a good run - is likely to end on the heels of the eventual Fed tapering (they can't buy bonds forever, can they? CAN THEY?!), among other macro catalysts (more on that here).

Is it ego? Did someone challenge Ben Bernanke's manhood at some point in time? Is Ben really that scared to have a "correction" under his time as Fed chairman? Perhaps all the talk of the next Fed chair has him thinking about the "legacy" he wants to keep behind. As duly designated representative for Keynesian economists of the world, Ben might be realizing that up is the only way to go; and he wants to get there by any means possible.

Unfortunately, I think his moves here have a better chance of making him the "guy who created the big bubble"; and I think history will frown on Bernanke's decision making, seeing him as pliable, manipulated, and soft.

As I commented in my previous article about QE:

What we know is that on Friday, the market opened up about 30 points and then quickly retreated. As I've often said, there's going to come a time when QE doesn't have the same effect on the market it once had. When retail loses faith in QE, the consequences are going to be several times greater than they would have been if the Fed had just let the market correct in the first place.

The fact that continuing QE didn't get any traction with the markets (aside from the two hours immediately after it was announced) means that investors have not only lost confidence in the market, but in QE. Now, when Ben goes to rope in QE, the effects on the market are likely to be exponentially more than had he of simply started the taper when everyone was expecting.

Punch Two - Government Shutdown Looming

The market wound up getting hit hard on Monday morning, as was predicted almost everywhere, on the heels of the government not being able to make nice with one another - yet again.

This article is being submitted late day Monday, so by time of publishing, we'll likely know how things have fared with this situation.

It was reported on Sunday by Seeking Alpha:

  • A government shutdown is looking increasingly likely on Tuesday, when the new fiscal year starts, after the Republican-led House approved measures that Democrats oppose and the Obama Administration has said it would veto. The legislation was part of a short-term bill that would provide financing to federal operations.

It was reported midway through the day on Monday, that the shutdown still seemed likely:

The Senate rejected the House's budget bill, making the shutdown of many agencies at midnight much more likely.

In a 54-46 vote, the Senate on Monday stripped provisions that would have delayed the implementation of Obamacare by a year, and instead sent an emergency spending bill to the House, where its fate is uncertain.

Without an agreement, many federal agencies will shutdown at midnight for the first time in 17 years.

So, by the time you're reading this, our government has likely shutdown. If they haven't, it's still likely to not fare well on the markets - but, assuming they have, it's likely investors are going to get skittish and head towards the exits.

In a situation like this, where I feel a short term bearish trigger is the only thing separating us from heading into a longer-term bearish market, I'm positioning bearish.

My New Bearish Portfolio

As I've previously stated, I feel this market continues to be on borrowed time (read that fantastic article by George Kesarios), with or without the government shutting down or the Fed continuing to dump money by the truckload into the economy.

Often, I've shared how I would conservatively position myself for a bearish market. I've put some small spins on that of late, and am offering my new bearish portfolio :

  • Small 5%-10% long position in dividend paying staple stocks like (PG, LO, GE,WMT)
  • Medium-sized position in bond funds and bond ETF's for 2013-2014
  • Medium-sized short position in companies that I believe are fundamentally in bad shape, that'll likely drop with the markets as well (BBRY, JCP)
  • Medium-sized position in actual gold or silver bullion, and small long positions in gold and silver trusts (GLD, SLV)
  • Medium-sized cash position in FDIC insured account (or several FDIC insured accounts) or in person
  • Medium-sized long positions in inflation-adjusted Treasuries (AAA rated)

I hope that this article can offer some perspective on how to effectively deal with the Government's pounding of the market, and the ensuing bear market that I believe is coming.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.