Protecting Your Wealth and Profit During the 2008 Crash
You know the economy is in bad shape when one of the world’s largest investment banks [Bear Stearns (BSC)] collapses and a few months later we witness the second largest bank failure in the history of the United States [IndyMac (IMB)]. And now we have news that Fannie Mae (FNM) and Freddie Mac (FRE) are insolvent and will need the Federal Reserve (i.e. taxpayers) to bail them out. Even the media cheerleaders are starting to look a bit less cheerful and entirely less believable when they suggest stocks are a bargain at these prices.
I’ve had family and friends start asking what they should do with their 401k, IRA and investments. They have received second quarter statements and are down anywhere from 10-30% year-to-date. Ouch. The average investor could stand to lose as much as 50% of the value of their retirement account during 2008 alone. Still, many investors are stubbornly clinging to the notion that the bottom is in and the markets and dollar will rally during the back half of 2008. Don’t ‘bank’ on it.
So what exactly should investors be doing to protect themselves and even produce positive gains over the next few years? The answer is simple: Get out of dollar-denominated assets. Go long gold and energy. Go short the Dow, Dollar and Financials.
The talking heads can repeat ad nauseam how gold is a barbaric relic that does not pay interest. I will let the following graph speak for itself. This is a comparison between the performance of the Dow Jones Industrial Average and the Gold Bugs Index since the start of the millennium. The blue line is the Amex Gold BUGS Index (HUI) gold stock index and the red line is the Dow Jones Industrial Average.
If you had invested in the Dow Jones Industrial Average at the start of 2000, your return as of July 2008 would be 0%. Factoring in inflation and the devaluing of the dollar over that same time period, your true rate of return would be something closer to negative (-40%). During that same period, investing in gold stocks would have produced a return of over 500%! Barbaric indeed.
And what about shorting? A number of factors including the potential for unlimited losses have scared many investors away. However, with the relatively recent advent of short and ultrashort ETFs, investors can actually bet on a sector going down without actually shorting stocks. The ETF is geared to go up as the corresponding index goes down, eliminating the possibility of unlimited loss, providing diversity (which works in both directions) and allowing investors to go short within IRAs and other accounts that do not usually allow shorting. In addition, what about performance? The following chart shows the ProShares Ultrashort Financials ETF (SKF), which I have been recommending since March.
From May to July, SKF more than doubled in price from $90 to $210 for a gain of 133% in just two months. Even with the recent sell-off, the ETF is still up about 50% since May 1.
The energy sector has also been extremely profitable to traders and investors alike over the past few years. Oil has appreciated even quicker than precious metals and some of the better-managed alternative energy companies have seen astronomical gains. One of our most recent picks, Renesola (SOL), more than tripled in price from our recommended entry point at $9. It has since given back a good portion of those gains, but is still up over 70% over the course of just four months.
The point is that there are always opportunities in the markets and just because the overall economy has slumped into a recession does not mean your investments have to do the same. Protecting your wealth and profiting during the current economic turmoil will take a shift in strategy, but your financial future could very well depend on it.
Disclosure: None
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This article has 16 comments:
The author confirmed his spculations by quoting historical data .
By the same token , history also tells us that what goes up must come down while what goes down must rebound .
I read another article 10 minutes ago saying that USA government should " crack down on Wall Street traders who are driving up oil prices by buying huge quantities of oil just to resell at a higher price " ( the " " is a direct quotation from the article ) .
Further , many recent articles indicated that some traders drove down the financials by " naked " short selling ; that is , driving down the price of a stock by heavy selling on the same stock without the possibility of having the same stock ; thereafter , buys back the same stock at lower prices to make profits ; confusing but magical ! Making profits out of selling nothing .
The author suggested to readers that they should long oil and short financials .
Is the author asking readers to support the manipulative oil " traders " who are likely to be cracked down soon as well as to support the " naked " shorters where their activities are to be limited by Monday or tommorow ?
The author indicated that the oil stock ( SOL ) recently went up three times from his recommended entry point of $ 9 and thereafter gave back a good portion of those gains ; using up 300% to a now up 70% as told by the author , the updated lose back is 230% !!?
Should the government take action to crack down like what they are doing on the " naked " short sellers , the oil bubble is destined to burst .
The author pointed out that the shorting index ( SKF ) for financials went up 133% from May to July .
Oh yeah , the " naked " short sellers did a great job in depleting the stock prices of financials ; many traditional investors who stored their hard earned savings in the otherwise stable financials must have lost almost all .
However , the author then show readers that the updated data recorded only a 50% increase since May 1 .
Using 133% - 50% as told by the author , the shortings have decreased by 83% !!?
Are we looking at the rebounding of financials as shown by the data given by the author ?
The " naked " short sellers are supposed to be illiminated by Monday or tommorow ; are we going to have a continuous rebound or going back to the lower than lowest for financials ? One would know this answer by the end of this coming week .
The traditional investors would naturally hope for a continuous rebound .
They of course , would like to recover their hard earned savings so that they would be able to update their mortgage payments .
The coming back of the financials would certainly reduce foreclosures by giving back the savings to the general investors .
The spiral can go up when we manage to overcome the " destroyers " .
't even spell his name,came to me to ask if his savings were safe in BAC.He said he had heard on tv that the banks were in trouble.He said he saw people standing in line to get their money in CA. and one man only got half....
Thats what the financial rally was about,not fundamentals.
Regarding your position and recent history of ( SOL )Renesola,it is now trading at 17,nearly double from your 9 rec.I believe we will see this one back to its former highs,and breakout to mid 30's on good to excellent quarterly results,as was the case for the last quarter.They have the money for expansion,so no worries about a secondary offering under the current PPS like some companies have done and hurt their PPS short term.
The financials are providing some extreme trading opportunities,as are the airlines and mortgage companies.Companies like ( TMA )Thornburg,trading at 30 cents from a high of 28 dollars,provide an incredible opportunity for the risk takers out there.They are a jumbo loan brokerage,but have been caught up in the sub-prime mess,and the housing market's general decline.As this decline flattens out and begins to show signs of a come back,stocks like TMA will provide huge,and I mean HUGE!,gains over the next two years.
The airlines are in a similar situation,but it is early in their revival.Very dood trading Ops. though.Be nimble,be quick...like Jack over the candle stick...heh heh heh..
Lathrop
I imagine that you bought into financial companies early in 2002 when home prices began to rise and exotic mortgage instruments drove the profit margins up for banks and mortgage companies. I also assume that you have staked a significant portion of your retirement savings on these institutions and therefore, the short selling is a personal issue, as though you are being robbed by people who do not even own the stock they are shorting.
It is hard to understand what a bank does when you are on one side of the tellers window and the "keep the change" jingle gets into your head, like the Pied Piper's tune that led the children out of their town.
After many an evening standing behind a 20 year old mortgage processor watching her electronically submit a loan application to a bank hundreds of miles away in California which approved a 500,000 loan to someone who does not speak English, has no job, nor visible means of support and yet the application is approved in twenty minutes speaks volumes of the fundamental rotten nature of your retirement savings. The short sellers did not originate these loans. The short sellers did not securitize these loans. The short sellers did not invent Auction Rate Securities. The short sellers did not extend consumer credit products to people on the fringe. All the short sellers did was point out the folly of easy credit and they were shut down by the Powers that Be.
If your retirement plan is conditioned on massive government intervention to "save" your investment, then I suggest re-allocating your portfolio to something less ephemeral and more substantive.
Fundamentally, I don't know what drives gold prices. In the long term, gold has seriously underperformed DJ.
Unless you believe you are better than Warren Buffet.
I'm seeing lower global growth...we are in the information age aren't we? Since when do backward countries call the shots with our economy? Tech is going to slow down too but not grind to a halt. Business investment can't remain as high as it has with a global recession coming. Europe must lower the euro eventually otherwise they'll have more strikes and more riots. They don't even work there and internationally, people are not going to be buying their overpriced goods. We may not even buy as much from China...aren't we their #1 customer? China needs us as much as we need them in my opinion. A cheap dollar is good for exports and eventually the dollar will become stronger once Paulson gets enough nerve to raise interest rates to curb inflation and work the housing debacle out. Step 1 is to shore up the banking system to stabilize us financially. Step 2: Raise interest rates to take care of inflation.
I bought Tesoro and Valero last Thursday. The companies are both at lows and are climbing paying a 1.9% yield. I also bought SKF on Thursday because I firmly believe the worst is not over yet in the financials. I don't day trade. I'm a long term investor and have been in the market since 1984.