What's this going to do to my retirement? Can I ever make this up?
October 26, 2008
I Hope So. I'm Personally Counting On It
Of course, there are no guarantees for either of us, but when the stock market corrected in August, 2007, I tried a strategy that worked well into the October recovery. I'm hoping it will work again, although when, I don't know.
Although your investments and mine have dropped drastically, they probably haven't fallen anything like some stocks and "ultra" index funds that are designed to move twice as fast as their underlying indices. An example of such an "ultra: fund is the Proshares Ultra QQQ Fund (Ticker: QLD) which tracks the NASDAQ 100 sub-index of the NASDAQ Composite. Since September 22nd, this fund has fallen from about $64 a share to $31 a share as of yesterday's close. If the NASDAQ 100 returns to its level as of six weeks ago, any money you invested in QLD would double. OK. If, on the other hand, QLD drops to $15 a share, you'd halve what you invested in it right now. This fund is down by a factor of four from its 2007 high of nearly $116 a share. Obviously, it has a lot of head room, given a market recovery. I don't have any money invested in it at the moment because I don't have any kind of comfortable feeling about what this stock market
is going to do next, or how much farther down the NASDAQ 100 index will go, or how long it will be before this index turns around. It seems to me (as I've mentioned elsewhere) that the economy is moving into a second phase of this credit crisis: from Wall Street to Main Street. Now the layoffs are avalanching, cutting consumer spending. leading to more layoffs. It seems to me that this must soon savage the banks again. Banks aren't going to dare to loan to businesses or individuals as individuals are laid off, and businesses struggle to stay afloat (and in some cases, don't make it). All of this would tend (I should think) reinforce risk aversion.
An even more dramatic opportunity may be found in the Proshares Ultra Emerging Markets Fund (UUPIX). As of yesterday's close, it was down 90% from its end-of-October, 2007, high.
In other words, it has the potential to 10-fold.
Examples of severely depressed stocks in which I hold small "positions" are Suntech (STP), General Steel, Inc. (GSI), First Solar (FSLR), the Powershares Wilderhill Clean Energy Fund PBW, and Vestas Wind Systems (VWSYF).
I'll try to discuss the risks (primarily the question of how much worse this economic slip-slide could get) when I have a little more time. Meanwhile, it's probably a good time to steer clear of this turbulent marketplace until the weather improves.
For my personal strategy du jour, see below. To sum it up, I'm going to sit on the sidelines until the markets either retest their October 10th lows, and pass or fail, or until December 5th, whichever comes first. That will mark the next decision point. Then if the market passes the test, it would be time to invest, maybe, one-third of my available resources in a mix of stocks and funds that should deliver twice the market's performance, with, for example, the other two-thirds in market index funds.. If the S&P were to rise 50% from its November low to about 1300, the two-thirds of my portfolio invested in the market index funds would increase by 50% to 100% of my current portfolio value. The third invested in ultra funds would rise 100%, bringing it up to two-thirds of my current portfolio value. Adding the two together would yield one-and-two-thirds of my current portfolio value. (To be continued)
Today, top hedge fund managers used words like "funereal", "shock
and embarrassment", "carnage", and "rubble", and on
Oct. 16th, one of them wrote, "In the third stage of a bear market,
everyone agrees things can only get worse. There's no doubt in my mind that the
bear market reached the third stage last week." (the week of the October
10th bear market low).
In the meantime, Todd Harrison reaffirmed today (November 7th) his conclusion that the stock markets have seen their 2008 lows (on October 10th). Then tonight, the Cabot newsletter is advising that the Economic Cycle Research Institute's Weekly Leading Index has hit its lowest level on record, dating back to 1949. The implication is that the forecast two to three months out calls for levels of distress not seen since World War II. Basically, the economy is falling off a cliff.
Paradoxically, the Cabot newsletter thinks that the stock market may be building a bottom here, since it's looking out six months or so into the future. The newsletter says that in order for this is to happen, the market indices will have to retest their bear market lows, typically five to eight weeks after those lows occur. Right now, on November 7th, we're sitting exactly four weeks out from the October 10th lows, so by or before the 5th of December, the markets should revisit their October 10th lows. If they pass that test and turn up... if the S&P holds above about 850, and the Dow doesn't go below 8,000... there's a good chance that we've seen the worst in this bear market (though not in the economy; that will take another six months). So what should we do right now? In terms of playing this rally, nothing. If the market retests its October 10th lows and passes them, that will be the time to buy. If it retests its October 10th lows and fails them, then we'll be glad we didn't buy anything now, and we might (or might not) want to cash in some of the equities we have left, since new lows will be in the offing. If the markets don't retest their October lows, then when they peak later this year or early next year, that will be a signal to sell at the intermediate top, since the bottoming process necessary for a true recovery won't have taken place.
The Cabot newsletter is quick to state that even if the markets pass a retest, it may still signify only an intermediate peak, and they cite the two-and-a-half month rise in April and May as an example of what we might expect.
I have an uneasy feeling that this may be more of an economic storm than some may anticipate, but maybe federal stimulus plans can forestall this downward spiral. But it would seem as though it will take a long time for the world to pay off its debts and then, at least for the United States, to rebuild its pool of investment capital.
Here is a good article by Kevin Depew: Five Things You Need to Know: Why Not Hyperinflation?
GM announced today that it had burned through $2.5 billion of its savings last quarter, and that it might face bankruptcy next spring without a federal bailout. "Brother, can you spare a billion or two?"
Good news! What
might you do to recoup the losses in your IRA's/401k's? I
believe I see a relatively safe, relatively sure way to accomplish
this by investing in a leveraged emerging markets mutual fund that
has fallen by a factor of about 8 from its top last October to its
Don't have anything but mutual funds that continue to fall in value? No problem! This fund will fall faster than your other mutual funds. When the time is right, I'm hoping you can sell your depreciated mutual funds and buy one or another of these more-depreciated mutual funds, and then ride it back up when the markets stage a partial recovery. During the Great Depression, the stock market fell for nearly three years. Then it bottomed, and over the next four years, it approximately quintupled. Even if the markets don't regain their October, 2007, highs for a decade, we may be able to recoup our losses and more with a judicial reallocation of assets when the runes finally indicate an intermediate bull market is at hand.. To give a specific example, if you had stayed in the stock market from its peak in 1929 to its bottom in 1932, the value of your portfolio would have shrunk to about 1/9th of its summer, 1929, value. If you had then switched to ultra mutual funds (I know-- they didn't exist in 1932) and had ridden them up to their peak values in 1936, you would have had about the same amount as you had at the stock market top in 1929.
We can revisit this idea when the time is ripe, but it might offer comfort to know that such a strategy is feasible (I used it to good effect between the August, 2007, low and the October, 2007, high) and is reasonably conservative.