Playing the Market in Difficult Times

My portfolio has taken a beating this year as gold stocks have fallen off the cliff. But gold is charging back as investors are seeking safe-haven assets that hedge against inflation. The dollar rally has lasted longer than many anticipated, but it is only a matter of time before it collapses back towards 70 and below.

It is important to remember that theses bailouts are incredibly inflationary. The Fed and government cannot print a TRILLION dollars out of thin air and expect action like this not to debase the currency. On top of this, the Fed just engineered a stealth cut of interest rates that effectively pushed down the overnight lending rate by about .75 percentage point to 1.25 percent. All of these actions and the market reacted by declining 5% yesterday! The gig is up.

Where should you put your money during these desperate times that we are just starting to experience? This is the question on the minds of millions of investors, from traders to the everyday American with a 401k or IRA that has lost 30% or more of its value since the start of the year. Well, I can tell you where I’ve been putting my funds and what type of returns they have been generating lately.

Subscribers were told to pick up UltraShort MSCI Emerging Proshares (EEV) on Sept 9 and again on October 1, when the ETF was trading between $100 and $110. On Tuesday it closed at $150, so we gained over 40% in a matter of weeks. I have been a long-term holder of both UltraShort Financials ProShares (SKF) and UltraShort Real Estate ProShares (SRS), but recently called a bottom in both ETFs and recommended picking up shares at $100 and $80 respectively. Since the October 1 recommendation, SKF is up 45% and SRS is up 52%.

While gold stocks are getting dragged down with the overall stock market collapse, the physical metal is actually up 20% in the last month. Tuesday alone, we witnessed gold advance over $30 while gold stocks [measured by the Amex Gold BUGS Index (HUI)] declined. This decoupling of the physical metal from mining shares was called out in our newsletter last week as we sold stocks and bought The Canada Central Trust (CEF). CEF was up over 5% on Tuesday.

The point is that there are always opportunities in the market, no matter how grim things become. As mainstream investors lose their shirts and pit traders cover their faces in pain, our portfolio is advancing and booking profits each week. I realize hard times are coming no matter how well I invest, but laying out a contrarian strategy to preserve and even grow wealth during the onslaught is something everyone should be contemplating. It might be the end of the economy as we know it, but I feel fine.

Comments

[Jimmy Lathrop:]

Anyone wondered what it would be like if everyone tried to redeem their shares in double inverse funds at the same time? Anyone wanna try? Yeah, I didn't think so. Whats the $NYMO telling us? (Hint: Oversold)

2008 Oct 08 07:24 AM

[Shadowyman:]

Any predictions as to what SKF will do Thursday, assuming the short-sell ban expires as scheduled Wednesday night? Is there any catchup for SKF or are the gains that it's missed out on in these past couple of weeks lost?

2008 Oct 08 09:49 AM

[Maxroom:]

It'll go "to the moon Alice, to the moon..."

2008 Oct 08 10:22 AM

[Paul H:]

This seems more like gambling than investing. Personally, I'm moving to an almost all cash position until there is some encouraging news on the economy and then I'll start gradually moving back into stocks. I may miss the bottom and part of the recovery, but I'd rather be safe. Commodities (including gold) are too risky for me.

2008 Oct 08 02:41 PM

[Carl Spackler:]

If all hard assets and even softer assets are falling, what does that tell us - deflation of course. Can anyone tell me when gold has risen over a long term period where all other assets were falling (long silence). That's right folks, never. Gold is the next victim to this delationary period. After the panic dies down, gold will fall to the $600 area. Too many gold bugs guessing inflation. To have inflation, you must have buyers. Where are the buyers?

2008 Oct 08 02:49 PM

[RatWatcher:]

Where should you put your money during these desperate times that we are just starting to experience?'

Hard as it is for a saver to say: just SPEND it. I'm getting that HDTV, a new computer, new bed....what the heck! I may as well demise in style. It can vanish on paper or pad my nest....

Note I will PAY, not buy on credit....lol

2008 Oct 08 10:34 PM

[hkn:]

Disgusted.

2008 Oct 09 11:01 AM

[the rat:]

I call jp morgan that were my 401k is located. I say what's the deal with my account I have stock, bonds, and a thing call smart retirement 2040
they tell me they can't tell me what to do. Am thinking to myself what the hell are you doing. Does anybody know what to do in times like this or do we just hold on and drown like rats

2008 Oct 09 05:03 PM

[jose oriol ...:]

What is Jim Rogers doing?
I bet he is doing the right thing right now...

2008 Oct 10 09:45 PM

[a believer:]

The local paper's October 10 front page news, ‘Nothing stops stock plunge,’ about the 679 point plunge in the stock market on Oct. 9, was juxtaposed with: ‘They all filled up for $20, and now they’re all wanted,’ and article about ‘possibly hundreds’ of criminals stealing from a local company by participating in a gas card scheme.

Both articles are actually about the same thing: how far we have fallen, and how much farther down we have to go.

In hindsight it is easy to see what has happened, but this chronology points clearly to what you should be doing next:

1) Someone decided that instead of providing goods and services with real value, they could Get Rich Without Much Effort by tricking financially uneducated people into mortgage obligations called ARMs.

2) This was so successful that many, many other people noticed these people Getting Rich Without Much Effort. They formed corporations that would buy, repackage, and sell these mortgages, Getting Rich By Not Really Doing Anything That Produced Value.

3) These corporations were so successful that top financial people in The Leveraged Debt Industry noticed. They devised ways to profit even more by creating and trading derivatives on the packaged debt, Getting Far Richer By Not Really Doing Anything That Produced Value.

4) This was so successful that nearly every 'bank' and many corporations devised schemes to buy and sell these derivatized instruments, Getting Even Richer By Not Really Doing Anything That Produced Value.

5) Fast-forward to January 2006, The Housing Music Stops, and sales and prices start a precipitous decline.

6) Over the next year, many poor people with ARMs experience at least one interest rate reset, and start missing payments.

7) Now, three things happen in quick succession in 2007/08: housing prices decline by 25 - 40%, poor people start losing their houses to foreclosure, and the real estate market essentially stops functioning.

8) This changes the whole game for the ARM persons Getting Rich By Not Really Doing Anything That Produces Value, which by now has grown to be the size of a small army and includes nearly every bank:

a) They are now seen by the populace as liars and thieves
b) They have NO MARKET into which to sell their products
c) There is NO MORE PROFIT from their existing mortgages because a hefty chunk of each package isn't even returning the prinicpal

9) The Dow 14,000 market, largely based on and supported by this army of ARM purveyors falls by 90% before slowly recovering (we are 40-45% of the way there, as of today). Don't believe it? Just look at the 85% drop in the NASD 100 in 2000-2001.

What to do next:

If you are in the army above, it is time for you to find a new profession. I am dead serious about this. If you insist on continuing to try to sucker poor people, you will now fail. Try something that uses your strengths to produce something with real value for someone; go back to school. Industry is STARVING for good workers, engineers, nurses, etc. And you will feel alot better about yourself.

Stay in cash if you have any - Cash Is King, as they say.

We are in for a good whipping, and we all deserve it, but we can come out stronger for it.

In his prophetic vision in the early 1990's regarding the world's financial future, Rick Joyner saw that "everyone...was going down on their knees." No one was spared. He saw an ocean full of two kinds of ships - the hospital ships (churches, missionaries, orphanages) that were helping the wounded, and the warships. The warships were the banks. The amazing thing about the warships was that one would pull up alongside another ship and fire point-blank at it, destroying it. The banks were destroying each other. However, "somehow the banks will survive." - From "A Prophetic Vision for the 21st Century," by Rick Joyner, 1999 (a great read by the way).

Ezekiel 22:12 NIV

'In you men accept bribes to shed blood; you take usury and excessive interest and make unjust gain from your neighbors by extortion. And you have forgotten me, declares the Sovereign LORD.'

2008 Oct 11 04:36 AM