05/31/2006
Yesterday's huge drop in stocks -- the Dow and S&P 500 both sank over 1.5%, while the Nasdaq plunged over 2% -- reminded us all that the prospect of a correction, and very possibly the start of a bear market, is present, and very real.
In last week's issue of the Making Money Alert we discussed the basic preparations every investor must make if they want to survive the next bear market. We explained that the first thing everyone needs to realize is that they must have a bear market investing strategy in place. We explained that this includes preset stop-losses on all equity positions, as well as the willingness to use unconventional investment vehicles.
This week I want to go into greater detail on those unconventional investment vehicles. But first, let's talk about one vehicle that you have to have in place first if you plan on surviving any bear market, and that is cash.
The first step in surviving a bear market is to have your money on the sidelines, in the safety of cash. You can't successfully negotiate a bear market while being 100% invested in equities, and that means you've got to have a high cash position.
Once you've got your cash protected and ready for the next move, that next move may, in fact, be into funds that move in the opposite direction of a major market average. These are the so-called "bear market funds" out there, and they are all designed to move up when the indices they track move down.
To help our subscribers keep track of these unconventional investment vehicles, we've created the Fabian Bear Market Funds Report, available exclusively to subscribers of our services.
This is the very report that helps me determine if the time is right to go bearish with my investments. Below is an excerpt of our most recent Bear Funds Report:
| TICKER | Name | Beta | Index | Price | % Chng | 1WK% | 4WK% | 8WK% | 12WK% | YTD% | 50D% | 200D% |
| | Bear Funds | | | | | | | | | | | |
| BEARX | Prudent Bear | -1 | - | 6.04 | 2.03 | 0 | 2.72 | 6.53 | 7.28 | 11.85 | 4.37 | 9.52 |
| PSPSX | Potomac U.S./Short | -1 | S&P 500 | 27.62 | 1.62 | -0.18 | 4.54 | 4.34 | 2.33 | 0.73 | 3.38 | 1.38 |
| SHPIX | ProFunds Short Small Cap Inv | -1 | Russell 2000 | 18.29 | 2.64 | 0.05 | 8.22 | 7.78 | 2.24 | -3.99 | 6.15 | -2.27 |
| BRPIX | ProFunds Bear Inv | -1 | S&P 500 | 30.11 | 1.62 | -0.23 | 4.48 | 4.37 | 2.38 | 0.9 | 3.35 | 0.48 |
| SOPIX | ProFunds Short OTC Inv | -1 | NASDAQ 100 | 19.96 | 2.31 | -0.05 | 7.89 | 10.22 | 7.14 | 6.8 | 7.26 | 7.08 |
| RYAIX | Rydex Arktos Inv | -1 | NASDAQ 100 | 23.84 | 2.23 | -0.04 | 7.87 | 10.12 | 7 | 6.71 | 7.2 | 6.87 |
| RYMHX | Rydex Inverse Mid Cap | -1 | S&P Mid 400 | 39.22 | 1.61 | 0 | 7.07 | 6.03 | 2.43 | -0.13 | 5.12 | 0.8 |
| RYURX | Rydex Ursa Inv | -1 | S&P 500 | 8.36 | 1.7 | -0.12 | 4.63 | 4.5 | 2.58 | 1.09 | 3.49 | 1.78 |
| RYSHX | Rydex Inverse Small Cap | -1 | Russell 2000 | 39.98 | 2.51 | 0.08 | 8.05 | 7.68 | 2.17 | -3.92 | 6.02 | -0.56 |
As you can see, you get all of the performance data for these, plus dozens of other bear market funds in one easy-to-read, easy-to-understand report. Don't you want to know which funds are doing well when everyone else's stocks are drowning? Well, that's what the Fabian Bear Market Funds Report is all about.
For more on how we use bear funds, stop-losses and our proprietary trend-following strategy to achieve market-beating returns in Successful Investing, click below:
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"To underscore our commitment to a diplomatic solution and to enhance prospects for success, as soon as Iran fully and verifiably suspends its enrichment and reprocessing activities, the United States will come to the table." Those were the words of Secretary of State Condoleezza Rice at a press conference this morning concerning Iran and its nuclear ambitions.
The possibility of talks with the Middle East power is a major policy shift for the U.S. that could have big ramifications for energy prices. In fact, immediately after Rice's comments this morning oil prices declined by more than $1 a barrel, a clear sign that the tensions with Iran have been a contributing factor in the recent surge in energy costs.
I think that the prospect of lower oil prices sets up the possibility of a washout here in the commodities sector. Commodities were on a tear earlier in the year, and subscribers to our services profited from that commodities boom. We got out of commodities stocks just in time, right before the selloff began.
If, however, we see further selling in oil as a result of positive Iran news, we could see a bottom in commodities prices that would once again make the mutual funds and ETFs tied to their fortunes attractive.
It's a waiting game here with respect to commodities, and as always, when it comes to investing, patience pays off.
There are two new developments in the ETF world that we'll be keeping a very close eye on.
On Monday the first ETF to invest in shares of public gold-mining companies began trading on the American Stock Exchange.
The ETF is the Market Vectors-Gold Miners ETF (GDX), and it is brought to us by Van Eck Global, a firm specializing in hard-asset funds. GDX is designed to track the performance of the Amex Gold Miners Index.
This benchmark gold mining index holds 44 mining stocks, with top gold mining companies such as Newmont Mining Corp., Barrick Gold and Goldcorp atop the list.
What's different about this gold ETF is that it tracks an index of mining companies as opposed to the current precious metals ETFs, which are based on the value of the actual metals (gold, silver). One caveat here to using gold mining stocks is that these stocks tend to be more volatile than the actual underlying value of the precious metals. So, if you are going to use GDX, just be aware that it is more susceptible to big market swings than previous precious metal ETF offerings.
This week we also learned that ProFunds Advisors —- a company whose funds we often recommend in the Fabian services —- is proposing the launch of the first leveraged ETFs that, if approved, would allow bullish investors to double the gains of the U.S. stock market, while giving those in the bear camp a way to profit from market declines.
ProFunds recently filed an updated prospectus for these new funds that seek to provide daily returns twice that of bellwether stock indexes including the Standard & Poor's 500.
The new ProFunds offerings will come in three basic varieties. The first is a bullish ETF that uses leverage to double the market's normal return. For example, if the S&P 500 index rose 1.5% in a day, the corresponding ProFunds ETF is designed to give investors a 3% return.
The second is a bearish strategy that aims to deliver the exact opposite, or inverse, of the market's return. If the index declines 1.5%, then the inverse ETF aims for a positive 1.5% return.
Finally, a leveraged ultra-short bearish fund seeks to provide twice the opposite of the market's return. So in the case of a 1.5% market decline, this portfolio would gain 3%.
Hey, we've been employing the principles of both leverage and inverse correlation to our ETF Trader and Successful Investing services for quite some time, but we've always had to do it via mutual funds. When the ProFunds ETFs come to market, it will be easier than ever to take advantage of both leverage and inverse correlation.
For more on how we use these principles in our ETF Trader service, click on the link below:
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Yesterday President Bush tapped former Goldman Sachs chief Henry "Hank" Paulson to head the Treasury Department. Pending his confirmation by Congress, Paulson will replace the ousted John Snow.
Well, finally we've got a Wall Street man at Treasury! What does this mean for the economy? First off, Paulson brings a deep understanding of capital markets to the job, something that his predecessor lacked.
Also, "Hank" is pro-tax cut, which is always good for stocks and the economy. In fact, President Bush hinted at Paulson's tax stance yesterday in his comments from the Rose Garden, saying that Paulson, "shares my philosophy" that Americans should be able to spend and invest as they choose. Hey, I can't disagree with that.
Another potentially positive development with Paulson at the helm is a shoring up of the ailing U.S. dollar. Past Treasury chiefs from Wall Street have tended to favor a stronger dollar, possibly to attract foreign funds to the U.S. capital markets. Of course, it remains to be seen if Paulson can make any kind of serious change with respect to currency policy, but history is on his side.
Overall, I think Paulson is a good pick for the president, and I think he will be good for the stability of the greenback, and for the stability and vitality of U.S. financial markets.
"It's a sad day when you find out that it's not accident or time or fortune, but just yourself that kept things from you."
--Lillian Hellman
These sobering thoughts from the American playwright remind us all that the only person responsible for you is you. Hey, I think Ms. Hellman could easily be talking about finances here, as the tendency for all of us is to blame the market, our broker, or just plain bad luck for our lack of success. Don't fall into that trap. Take control, get educated, and don't let you keep you away from what can be achieved.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars, or anything else.