Leif Peterson

Play the Bounce to Hedge Your Longs

Very good points. SKF, SCC, DOG, REW, etc. are good options. A pattern that has emerged is when 1/5th to 1/4 of your portfolio is inverse ETFs, it can balance the downside from having growth stocks. However, during the current crisis you will need to keep 4/5 of your wealth in treasury-only (bond) funds which are the lowest risk investment in the market. Check out Capital's CPFXX, or Fidelity's FDLXX, and Ishares Lehman TIP. TIP has actually weathered the storm quite well over the last few weeks.

By now we have heard it all: stay long, go short, don't panic sell, or "the US markets have a history of surviving incredible corrections/bubbles" so just ride out the storm. Some groups that are so bent on fundamentals expect you to assume that good fundamentals attract money -- so just hang on and every will be fine. Unfortunately, most of the (irreversible) damage regarding toxic money has already been done, and it appears that we will need to brace ourselves for the ensuing shock wave. In business, variation (variance) means risk, so if you think the 400 point rebound today following yesterday's correction of 700 points are good news, then you need to expand your horizons. Daily volatility bouncing plus/minus 150, 300, 450, 700 is a telltale sign of huge market instability -- like a wire cable that's getting ready to snap.

The political side of the equation is not good either. Have you realized that Congress now has Executive Branch (which includes the Fed and Treasury) in a stranglehold? All Gov't expenditures have to be approved by Congress, so until that happens, we are far from any bailout approvals. Last, a bailout would have nothing to do with the ideology of having free markets -- since a true free market will let the bankrupt and poorly run businesses die out.

Finally, financial debt now exceeds 41 trillion, and this is why the skimpy 0.7 trillion (700 billion) bailout is a band aid fix. Throwing money at the problems plaguing Wall Street is not the solution, instead, fundamental changes need to be made. Transparency has a lot to do with it. Specifically, increased transparency is needed for the gold carry trade, where central banks loan bullion every day to bullion banks, who list it for sale in the London bullion market -- this only serves to keep the price of gold down. Problem is, the actual listing is duplicative, so the same gold bullion can be listed for sale and listed in storage by multiple banks on the same day. No one knows what goes on here except for the central banks, bullion banks, and IMF. Supposedly, IMF is going public at the end of 2008 -- and this is in part what some of the gold bugs who expect 2000 are hedging on.