Will You Win the Bull-Bear Tug-O’-War?

Sharon A. Daniels President Weiss Capital Management, Inc.

Martin is in Japan this week, visiting his son Anthony and checking up on Asian markets firsthand. So he asked me to fill in for him today.

I’m pleased to have this opportunity — especially at this time of the year when markets have an historical tendency of turning in some big surprises.

Plus, this is also the two-year anniversary of the Lehman failure, the landmark event that’s viewed as the start of the Great Financial Crisis.

Despite the years since, the stock market has gone basically nowhere, and the risk of a double-dip recession is now growing. This is why the firm I run, Weiss Capital Management^†, is hosting a special free webinar this Wednesday. (Go here now to sign up.)

Plus, it’s why I want to give you — right here — a quick summary of our views on where we stand …

The Forces Behind the Tug-o’-War

The bears point out that the U.S. economy is still sinking fast despite massive government spending, lending and guarantees.

Consumers are still not spending, despite the lowest borrowing costs in generations.

And, perhaps most important, banks are still not lending, even though they’re sitting on piles of cash courtesy of the Fed’s money printing. All of this is true!

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Despite these forces, we don’t expect any new major stimulus package to change these dynamics anytime soon. We’ve seen no improvement in the employment picture, with the jobless rate actually ticking HIGHER last month to 9.6 percent.

And we see the floor falling out of the very same market that helped trigger the Great Financial Crisis in the first place — housing. ¹

Meanwhile, however, the bulls argue that corporate balance sheets are stronger and market valuations are more attractive.

This is also true!

But in a weak economy, and especially in a double-dip recession scenario, these factors alone cannot justify investing as usual.

Quite to the contrary, at best, these crosscurrents are battering the markets with extreme UP and DOWN volatility: In the first eight months of 2010, US stocks flip-flopped repeatedly, with markets rallying in four of the months (February, March, April, and July) but also declining in four (January, May, June & August). ² The jury is still out on September, but it’s historically the worst month for stocks.

In sum, it’s a giant tug-o’-war between the bulls and the bears.

How long can it last? For an answer, consider …

Japan’s Lost Decades!

From 1990 through 2010, Japan experienced a 20-year, zigzag bear market … with no end in sight!

Japanese investors have fared badly. Over and over again, they were lured back into stocks with government programs and promises to make things right. And over and over again, their hopes were dashed; their portfolios, sinking further and further.

Just take one look at the chart above and you’ll clearly see how Japanese investors following a buy-and-hold strategy were severely hurt. And imagine the plight of those that bought after major rallies or sold after major declines!

The good news is that there is a way to not only cope with this volatility but turn it firmly in your favor. Here’s what to do …

First, if you’re still holding vulnerable stocks or equity mutual funds, pare them back.

Second, if you must own stocks, focus on higher quality issues with a long track record of consistent dividends. These are companies that pay as you wait … even if the market is going sideways.

Third, short-term Treasuries are fine for liquidity, but not as a longer-term solution. Even the yield on 2-year Treasuries has now dipped to a record low of less than ONE-HALF of one percent! ³

What’s worse, the Federal Reserve says it intends to KEEP rates near zero indefinitely to attempt to jumpstart the economy.

Fourth, fixed-income funds are another alternative to consider as a way to diversify from stocks and cash, but stick with short- to medium-term maturities and high-quality funds. Right now, for example, some foreign fixed-income funds provide higher cash flows and only modest additional risk if you stick with the higher quality.

Fifth, consider adding a modest hedge component for your portfolio — to help offset downside risk. Inverse mutual funds and inverse ETFs on both stocks and bonds are the vehicles of choice, but use them sparingly and don’t hold them for the long term.

Sixth, if you’ve taken these precautions with the core of your portfolio AND you want to learn how to harness the market’s big up-and-down swings to your advantage, join us at our webinar this Wednesday.

Best wishes,

Sherri Daniels, President
Weiss Capital Management, Inc.

^†Weiss Capital Management is an SEC-Registered Investment Adviser. It is a separate but affiliated entity of Weiss Research, the publisher of Money and Markets. Both entities are owned by Weiss Group, LLC.

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¹ Bond Wave Advisors: Weekly Market Summary, 9/7/10

² Bloomberg market data, 9/2/10

³ Barron’s: Hoping for the Best, 9/4/10

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