After a dead cat bounce late last week, the Dow has resumed its slide, shedding another 72 points yesterday.
Since May 10, the Dow has plunged from 11,642 to 10,942. Why? Because we have an inflation-spooked Federal Reserve Bank. Because its chairman is a chatterbox novice, giving the market mixed signals, wavering and waffling.
Meanwhile, I think the U.S. economy is struggling. Just a few of the latest strikes against the market:
Interest rates are on the rise. The yield on the 30-year Treasury bond has jumped from 5.01% to 5.18% and it’s looking more certain that the Fed will raise interest rates again at its next meeting.
Our economy created only 75,000 new jobs in May, half the growth we’ve been seeing. And it appears that GDP will rise only 2.5% in the second quarter, less than half the 5.3% growth we saw in the first quarter.
Consumer confidence is plunging. The University of Michigan Consumer Sentiment Index dropped to 79.1 in May from 87.4 in April. That doesn’t surprise me in the least: The bottom 20% of U.S. households are now spending more than 10% of their budgets on energy.
May CPI, PPI, and import prices were all horrible. Mike Larson tells you more in “4 Hidden Surprises Come to the Fore.”
Clearly, the U.S. economy is not where the growth is. So, what can you do?
First Priority: Safety
Keep a healthy amount of your money in ultra-safe places like U.S. Treasury securities (or a Treasury-only money market fund). I think this is a smart strategy: You’ll get decent income, have plenty of ammunition ready when the market finally makes a real turnaround, and be able to sleep at night knowing that your money is well protected.
Second: Tangible Assets
Consider tangible assets like gold, oil, and other natural resources. Larry and Sean have told you about this many times. If you’re not yet on board, what more are you waiting for? You have the evidence. You have the correction. Unless you are totally adverse to risk, now’s the time. For the names of specific vehicles, see “Gold plunges $45, now get ready for …” and “Wild Goose Chase? Or Golden Eggs?”
Third: Cheap Insurance
If you’re holding on to stocks that you think could torpedo your portfolio, get rid of them.
If you’re loaded with stocks that you want to keep, at least buy some cheap insurance.
Traditionally, investors protected themselves against market declines by “shorting” stocks. In that scenario, an investor (the “short seller”) borrows shares from someone else at a particular price. If the stock falls while the shares are on loan, the short seller can return the stock to its rightful owner and pocket the difference.
Short selling simply lets you reverse the normal order of the transaction:
Instead of buying low and selling high … you actually sell high and then buy low.
But there are several disadvantages with short-selling.
- If the stock rises steadily in value, the short seller will lose the difference when he decides to replace the borrowed shares. And since a stock can rise indefinitely, a short seller’s potential losses are, theoretically at least, unlimited. Not a pleasant thought!
- With most securities, you have to wait for an uptick before you can go short. If the stock is falling nonstop, that could be a long wait, and you’d miss the opportunity to profit.
- If a dividend is declared, guess who has to pay it! You! Also not fun.
- Even if you don’t want to borrow a penny, you’ve got to open a margin account. Reason: You’re borrowing an asset — shares in a company.
That’s why I like put options. Put options also can help you profit from a decline. But they have none of the four disadvantages of short selling: Your risk is limited. You don’t have to wait for an uptick in the stock or the option. You’re not responsible for the dividends. And you don’t have to deal with pain-in-the-butt margin accounts.
You may need to get clearance to trade options. But if you’re strictly buying options (not selling or “writing” them), it should not be a problem.
The put options give you the right to sell a set number of shares at a fixed price. When the agreed-upon period is up, the contract “expires.” The total amount you risk is the price you paid for the contract.
Here’s the good part: If the stock falls in value before expiration, the value of your puts can go way up. That gives you lots of upside with a strictly defined downside. Just my cup of tea.
For example …
Let’s say ABC stock is selling for $50 a share. And let’s say I pay $200 for a put option that gives me the right to sell 100 shares for $40. If the stock goes up, I throw away the option and forget about it. My loss: $200 plus any commissions.
But if the stock plunges to, say, $20 per share, I can buy it at that price, and the option gives me the right to sell it for $40. My profit: $20 per share or $2,000!
Better yet: I don’t even have to bother with the shares. I can just sell the put option itself, probably for $2,000, if not more.
I wouldn’t bet the farm on options. But it’s cheap insurance. And a small investment can go a long way.
Fourth: Greener Pastures
For a long time now, I’ve been telling you all about the amazing opportunities over in Asia. Now, let me give you a new, old approach …
In 1850, a Bavarian immigrant named Levi Strauss left an area where there was no growth and sought a hot-growth market overseas — San Francisco at the height of the gold rush.
At first, things didn’t go so well: His traditional products — tents and wagon covers — weren’t selling.
But, he adapted quickly: He started fashioning pants out of his remaining canvas stock, and business exploded. Miners loved these new dungarees.
As they say, the rest is history. The lessons I take from this are threefold:
Lesson 1. Make sure you’re where the growth is. Right now, I believe that’s Asia.
Lesson 2. Don’t invest all your money in the miners and risk takers. Also invest some of it in the companies that sell essential tools to the miners and risk takers. Whether they win or lose, they still have to buy those tools.
Lesson 3. Be flexible. If your strategy isn’t working, don’t be afraid to change it. Adapt to the new conditions. The biggest profits are made by going against the grain.
Think Picks and Shovels,
Off the Beaten Path
Right now, most of my peers are looking for new, red-hot tech superstars. Not me. As I said, Levi Strauss made his fortune selling to the risk-takers, not panning gold himself.
During the Gold Rush, miners needed picks, shovels, and durable pants. Today’s tech companies need batteries, LCD screens, communication chips, amplifiers, connectors, keypads, circuit boards, and software.
Heck, don’t take my word for it. Just smash open your old cell phone and take a look at what’s inside! The names you see on all those little parts are the kinds of companies you should be investing in.
Where are they located? Most are in Asia, where business costs are lower. Plus, it’s easy to get great talent over there, as I explain in “Why Many U.S. Companies Don’t Stand a Chance.”
It’s also no coincidence that a lot of these investments will be unfamiliar names. After all, the best opportunities are usually stocks you’ve never heard of. That’s especially true when it comes to foreign countries.
Remember that third lesson: The path less traveled is the most prosperous one.
Best wishes,
Tony
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About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Colleen Collins, Amber Dakar, Ekaterina Evseeva, Monica Lewman-Garcia, Wendy Montes de Oca, Jennifer Moran, Red Morgan, and Julie Trudeau.
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