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It is now Labor Day 2011. The European markets have just closed. European bank shares closed at a new 29-month low. More sub-prime mortgage woes, fears of recession, and political disunity all fueled a 3% to 4% drop in the overall European market today.

Here at home, we kicked off our extended Labor Day weekend with a completely dismal jobs report. Our world-leading $14 trillion dollar economy did not create one job in the last month and our markets sold off by over 200 points on Friday. Now we wait for President's Obama's big speech on jobs this Thursday.

As of now, it sounds like it will be more of the same: infrastructure, extend unemployment benefits, and more payroll tax holidays. In other words, don't expect the jobs picture to get markedly better, any time soon.

In addition to this, we continue to get very weak economic reports, we have a GDP that has been revised downwards to 1.0%, a ten year treasury that is now under 2.0%, and Gold that is now approaching $1,900 per ounce.

The bond market is now pricing in a higher than 60% chance of another recession. This would not be good for an economy that has just crawled its way out of deep recession.

I sent out a Bear Warning right here on SeekingAlpha back on August 8th. In that article I stated that the 30 month-old bull market that began on March 5th. of 2009 was in severe jeopardy. I also wrote that I had been fully invested during that entire bull, but that I was starting to take defensive action just in case the bull came to an end. I also listed my favorite stocks at that time and my favorite hedges (inverse ETFs).

I followed up a week later with a "Bull is Dead" article and very specific advice on what investors should be doing. In the article, I delivered the eulogy for the 30 month-long bull, and again gave specific advice on what investors should be doing. I again identified specific inverse ETF's that would make for wonderful hedging tools. I also stated in the article that the chances for another recession were about 50/50 at that time. I now believe those chances have gone up since the most recent economic reports have come out.

I listed many stocks that should not be owned under any circumstances at the current time. I mentioned Cisco (CSCO), General Electric (GE), Microsoft (MSFT), Intel (INTC), Pfizer (PFE), Merck (MRK), Home Depot (HD), Wal-Mart (WMT), Goldman Sachs (GS), and Bank of America (BAC) as examples.

I could have listed many, many more, but I chose these widely-held, bell-weather examples of stocks that have performed miserably over the last 10 years, and still need a very vibrant economy just to keep up with the market. Why would anyone continue to own these stocks in this current economic environment? Aren't we all seeking alpha?

I also listed many current Gunderson "A" rated stocks that are actually thriving in this weak economic environment. I used AutoZone (AZO), Dollar Tree (DLTR), and Alliance Resource Partners (ARLP) as examples. I could have listed numerous others (actually about 8% over the overall market), but chose these three to show how many companies are actually flourishing in this very challenging economy.

My advice today is still the same: Get rid of stocks, mutual funds, and ETF's that have just kept up with market or even underperformed the market over the last 1, 3, 5, and 10 years. What makes you think that all of a sudden they are going to deliver the alpha that we all so greatly seek?

It makes total sense to continue to hedge your portfolio with inverse ETF's that go up when the market goes down. Let's re-visit the three that I currently have my clients' portfolios hedged with:


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SEF is 1:1 correlated inverse ETF on the financial stocks. I still believe that the financials are one of the most vulnerable areas in the market. 31% of all home sales continue to be foreclosures. The banks still have a lot of "writing-off" to do. The chart above shows just a simple 50 day moving average. Notice how strong this chart currently is.


(Click to enlarge)

EFZ is a 1:1 inversely correlated ETF on Europe. Greece walked out of austerity talks last week and the European banks got hammered again today. Europe also continues to be one of the most vulnerable areas of the global markets. If I hear one more analyst on CNBC, FOX, or Bloomberg state that the European banks are a buy at this level, I am going to puke! Sorry, but I try to tell it like it is. If you disagree with me, you know where the "buy" button is on your computer.


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EUM is a 1:1 inversely correlated inverse ETF on the Emerging Markets. Here is how the Emerging and International markets are performing year-to-date:

  • Thailand +1.1%
  • Canada -5.4%
  • Mexico -7.2%
  • Europe -11.1%
  • Japan -12.0%
  • China -13.9%
  • Russia -14.5%
  • Vietnam -23.4%
  • India -23.9%
  • Brazil -17.5%

How can the emerging and international markets emerge without the United States and Europe leading the way? If you still have exposure to these markets you may want to question your money manager or maybe your own judgment. I know that this statement will not sit well with asset allocators, but why ride an asset class into the ground because your asset allocation model says you should have a 10% exposure?

I would continue to use EUM as a hedge against a potential bear market. Some would question why I don't use leveraged inverse ETF's as hedges? My answer is, because I don't like them. While they may be useful for short-term traders, they are a little too volatile for my intermediate to long-term approach to the market.

Now let's turn to a positive note. As I stated earlier, there are many companies that are flourishing in this weak economy. Think hard times, tight money, necessities of life, deep discounters, liquidators, etc. These are the stocks that you want to continue to own in your portfolio.

Check out the phenomenal 1,3 5, and in many cases 10 yr returns on the following stocks:

First Cash is a pawnshop operator:


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Date from Best Stocks Now iPhone app.

Green Mountain is the maker of the Keurig single-cup coffee maker:


(Click to enlarge)

Date from Best Stocks Now iPhone app.

Alliance Resource Partners is a Coal MLP:


(Click to enlarge)

Date from Best Stocks Now iPhone app.

AutoZone is a nationwide auto parts retailer:


(Click to enlarge)

Data from Best Stocks Now iPhone app.

Core Labs is Netherlands based Oil Service company:


(Click to enlarge)

Date from Best Stocks Now iPhone app

Fomento produces Coca-Cola in Mexico and 3 other Latin American countries:


(Click to enlarge)

Data from Best Stocks Now iPhone app.

Monroe Muffler Brake operates 798 service and tire stores:


(Click to enlarge)

Data from Best Stocks Now iPhone app.

Priceline.com is a deep discount travel agency:


(Click to enlarge)

Data from Best Stocks Now iPhone app.

Ross Stores is a nationwide deep discount retailer and liquidator:


(Click to enlarge)

Data from Best Stocks Now iPhone app.

TJ Maxx is also a nationwide deep discount retailer:


(Click to enlarge)

Data from Best Stocks Now iPhone app.

I could give many more examples of stocks that continue to flourish even in this economic environment. I currently have about 125 Gunderson A- rated or better stocks in my database of just over 2,700 stocks.

Notice too, how these stocks performed during the 2008 bear market. Many of them were actually up that year! In addition to this, in order to get a Gunderson A- grade or better, these stocks must still possess good value. I demand performance, value, and a measure of safety in the stocks that I own. By the way, I also like to own about 25 positions in my portfolios at any given time.

This continues to be a very weak economy. The 30 month Bull Market is over.

There is a better than 50% probability that we are headed into another recession.

Owning stocks that need a vibrant economy makes no sense at all.

Hedging at this point in time, makes perfect sense.

Continuing to own stocks that flourish during times likes these also makes good sense for now.

Source: Continue To Adjust Your Portfolios For A Bear Market