Friday, March 10, 2006

Warning! Fiscal Hurricane Approaching! Is Your Portfolio Secure? Part 1

This March 8th article is the most recent update to an article I shared with you on March 4th: Ominous Warnings and Dire Predictions of World's Financial Experts. This update provides some more insight, and also provides some advice for weathering the looming financial storm.

In a previous article entitled “The Ominous Warnings and Dire Predictions of World’s Financial Experts - Parts 1”, (Part 1 of 6) we learned what was probably in store for us short-term and in the next few years. These experts used words like ‘Economic Armageddon’, “Financial Apocalypse’, ‘Financial Disaster’, ‘Financial Train Wreck’, ‘Deep Funk’, ‘Great Disruption’, ‘Category 6 Fiscal Storm’, ‘Economic Earthquake’, ‘Serious Collapse’, ‘God-Awful Fiscal Storm’, ‘Debt-Driven Meltdown’, ‘Major Upheaval’, ‘Demographic Tsunami’, ‘Rude Awakening’, ‘Economic Pain’, ‘ Systemic Banking Crisis’, ‘An Accident Waiting to Happen’, etc. to describe what we are in for. It begs the question “How should we position our assets given the dire predictions of these imminent economists and analysts who are all much of the same mind as to what may well be in store for the U.S and, indeed, the global economy very soon?” Again, we have compiled a detailed and comprehensive summary of what many of these very same individuals, and others, have to say. It is so extensive and informative we have taken the liberty to divide it into 4 parts.

Warning! Fiscal Hurricane Approaching! Is Your Portfolio Secure? Part 1

Martin Weiss, Chairman of Weiss Ratings, Inc. and author of ‘The Ultimate Safe Money Guide,’ has said:

1. “Get out of the stock market.
2. Put up to 60% into short term treasury bills.
3. Put up to 20% in 3-5 year treasury notes.
4. Put 10% to 20% into gold bullion and/or gold mining shares (Editor’s Note: and other precious metals and energy stocks and/or the warrants of those that expire in more than 3 years) depending on how bullish you are on this sector.
5. Put 10% to 25% in one of a variety of hedge funds depending on how aggressive you want to play the market.
6. Be patient and wait for the bottom of the stock market and then buy with both hands but beware of false bottoms. Include gold, etc in such a portfolio because gold is negatively correlated with other asset classes. It is a great way to balance your portfolio.
7. Pay off all your debts including the mortgage on your home.
8. If you are mortgaged to the hilt then sell NOW and rent for a few years and then buy back in, if you wish, once prices have dropped (and they will!) or once the danger of the decline has blown over”.

Robert R. Prechter, in his book ‘Conquer the Crash – You can Survive and Prosper in a Deflationary Depression’ states that “ if you are preoccupied with pedestrian concerns or blithely going along with mainstream opinions, you need to wake up NOW, while there is still time, and actively take charge of your personal finances. Being unprepared will leave you vulnerable to a major disruption in your life. Being prepared will allow you to make exceptional profits both in the crash and in the ensuing recovery. The main goal of investing in a crash environment is safety because when deflation looms, almost every investment category is associated with immense risks. Let’s look at each category.

1. Bonds: Own short-term federal government bonds which can keep rolling over at even higher yields to compensate substantially for whatever price losses occur.
2. Real Estate: Real estate prices have always fallen hard when stock prices have fallen hard. What screams ‘bubble’ – giant, historical bubble – in real estate today is the system-wide extension of massive amounts of credit to finance property prices. People around the country are nearly unanimous in thinking that this is their last great opportunity to buy or re-finance a house/condo. Naturally, it is the opposite: it is your last chance to sell.
3. Cash: All assets go down in price during inflation except one: cash. If you have cash on hand when the stock market hits bottom you will be able to buy incredibly cheap shares that almost nobody else can afford because they lost it all when their stocks collapsed. What kind of cash? You should own high-quality short term notes such as Treasury bills which are better than having money in a money-market fund given the fees related to holding same. The beauty of safe near term debt is that instead of getting killed by rising interest rates, you van benefit from them by purchasing new ones at expiration.
4. Equities: The number one precaution to take at the start of a deflationary crash is
a) don’t be invested ‘long’ in stocks, stock mutual funds, index futures, stock options or any other equity based investment or speculation.
b) consider short selling specific individual stocks, buying inverse index funds and buying actively managed bearish funds.
5. Commodities: During the three years of intense deflation back in 1929-32 in which the stock market crashed commodities crashed too.
6. Precious Metals: Precious metals are likely one day to become the most important asset class to own so I advocate holding a healthy amount of gold, silver and platinum NOW because these metals should perform well on a relative basis compared to other investments as they will not fall 90% from today’s prices, much less to zero, like so many stocks and bonds and once you have bought gold, silver and platinum you will have it. If investors worldwide begin to panic into hard assets, locking up supplies; if governments ban gold sales; if gold, silver and platinum prices go through the roof you won’t be stuck entirely in paper currency. You will already own something that everyone else wants! Should you buy these precious metals now? Yes, if you want to arrange for capital safety in every way that you can imagine, then diversification into real money is a necessary part of that effort. What type of precious metal holding is best? For maximum safety you should own gold and silver in physical form, outright. Coins are a good medium for smaller portfolios. Mining company shares probably will enjoy no false advantage over other companies during the deflationary market adjustments but should do very well when the overall stock market rallies”. (Editors Note: owning the warrants of mining companies which have an exercise date of in excess of 3 years would be an excellent alternative in such an investment environment.)

Ravi Batra, Professor of Economics at Southern Methodist University and author of the book ‘The Crash of the Millennium’ believes “we are going to have an inflationary depression and when that depression comes, high ticket items, along with oil, raw materials and farm products (i.e. commodities) could experience a serious deflation while the cost of services and imported goods will keep rising. Let’s look at each category:

1. Stocks/Mutual Funds: Stock markets will tumble so it is prudent to sell your shares and related investments. When the Dow is close to 2600, the turning point when the current bull run started in 1991, then perhaps it would be time to re-enter the arena cautiously, via mutual funds.
2. Bonds: Until the downturn is complete bonds are very risky to own so sell what you have unless they are paying in excess of 8%
3. Real Estate: This is not a good time to buy a house. If you own one already, it is time to refinance it, especially if you have a variable mortgage because interest rates are going to rise even further. If you live in an apartment, stay there. Renting is more prudent than buying. In spite of the inflationary nature of the coming depression, property values will tumble in most parts of the U.S. In the long run, house prices will continue to climb. In the short run, however, house prices could sink and sink hard.
4. Precious Metals: Precious metals do well in an inflationary environment. Gold is worth considering only as insurance against a financial meltdown and, as this decade is going to be far from normal, NOW is the time to buy gold – as much as 10% of your portfolio. I prefer gold coins because, while they cost a bit more, they have higher liquidity and some of them are legal tender. In my view gold is preferable to silver and platinum as a hedge against calamity, especially in an inflationary depression. While buying shares of companies involved in gold mining operations is another way to participate in the glitter of gold, such shares are likely to fall when share prices fall in general. (Editors Note: owning the warrants of mining companies which have an exercise date in excess of 3 years would be an excellent alternative in such an investment environment.) When the stock market turns around begin buying gold stocks or precious metal mutual funds in earnest - up to 20% of your portfolio.
5. Cash: To remain liquid and still earn the higher rates I suggest you purchase 1 year and 2 year Certificates of Deposit. They are one of the safest places to park your money. If high inflation is accompanied by official confusion and uncertainty, then 5 year CD’s and government bonds would be preferable to those of longer duration provided they offer a substantially larger return than the two to three year debt instruments. Don’t park more than $100,000, the insured amount, in any one bank. Open accounts in other banks where necessary to keep under that $100,000 insured limit.
6. Currency Trading: With the impending crash of the U.S. dollar it is prudent to invest a portion of your assets in the government bonds of such countries as Canada, Britain and/or Switzerland and a country of your choice using the euro. Another alternative would be the timely purchase of those precious mining company shares (Editor’s note: or 3 year plus warrants) trading in Canadian dollars on the Toronto or Vancouver stock exchanges.
7. Debt: Pay off your credit card debt and all other instalment debt instruments, reduce your discretionary expenditures and start saving a greater proportion of your monthly income to ensure that you can ride out the approaching fiscal storm.
8. Pension Protection: If you are involved in a pension plan such as a Keogh, 401(k) or an IRA, ask the trustee to sell your portion of the stocks and put the money into a NOW account. As soon as the dollar begins to plunge, and interest rates begin to rise, move your pension money into short-term government bonds for one to two years. If you are retired, then take your pension in a lump sum, or as much of it as possible, and deposit the money in money market accounts in different banks. Bank deposits are the safest as they are protected from inflation in that interest rates will rise to offset such increases in inflation and benefit your bank accounts.”

Walter Deemer, Publisher and Principal of Technical Analysis for DMR Inc. and formerly with Merrill Lynch and the Manhattan Fund in New York and Putnam Funds in Boston, in an interview recently with Sandra Ward, stated that “The yield curve is now completely inverted and an inverted yield curve almost always precedes recessions. The stock market always moves up and down before the economy does. Therefore, if the economy is going to have a recession, the stock market is going to have a bear market. It always does. The exception in 1998 may not have preceded a recession – but it occurred in conjunction with a 22% bear market. The odds are overwhelmingly in favor of a recession/bear market.”

It is recommend investors strategically position themselves in a wide variety of assets including precious metals, mining shares and long-term warrants. Nothing like taking what the experts say to heart and investing accordingly.


Out at the peak said...

Oil is mostly an imported good. Many commodities are these days. In this case, wouldn't these items remain to have a high price?

Do you like BEARX? What bear fund is highly recommended?

Anonymous said...

More pesky questions:

I was gifted with COP and TXU shares, also Bank of America. I sold the Bo A to put in CD's but had the idea that oil companies and utilities would hold value.

Am I missing an important part of the big picture?

I don't know squat about stocks and would appreciate any insights.

Oh yeah, what about these Franklin Templeton funds?

I need this $$ to buy a house when the market crashes and wish to God I had more (or at least SOME!) knowledge about these funky stocks and such.

mtnrunner2 said...

I just read, in one of the links to the article posted, that oil is the place to invest, because India and China are just catching up to US consumption plus it is likely that the OPEC countries overestimated their reserves by 50%.

My question about exiting the stock market: I had read elsewhere that the stock market will continue going up, because more investors are entering. There've been record inflows in the last few months, and I wonder if investors are moving from RE to stocks. It's not that the companies are more valuable, but the demand for their stocks is higher, driving up the price. The only question is, when do we get out? Does anyone know more about whether we should be getting in or out of the stock market, and please give data if you respond, not opinions or hearsay, like I did :)

Randy said...

Peak, Agree Oil will remain high, unlesss recessionary pressures cause a reduction in worldwide consumption. Not familiar with BEARX

I can't provide investment advice--only passing along info from folks much smarter than myself.

Was probably wise to dump BOA and I can only assume that OIL and Utilities will continue to fare well.. OUT AT THE PEAK ( should be in a better position to offer advice in these matters.


It's a fact some OPEC countries have been overestimating reserves.

see this article, which states that Kuwait may possess only half the amount of oil reserves that it officially has been stating for years. I'm sure others are in the same boat.

Re stock market: I don't think anyone can accurately time these things. Take the housing bubble for example; many folks have been predicting the top for 3+ years, and only now is the data finally starting to suggest we've reached the top.

Also, there is much controversy regarding our gvt propping up the stock market to prevent a crash..

Google: "Plunge protection team"
or "Hindenberg Omen"

and/or see these links:

Best of luck in whatever you do...

Anonymous said...


Anon with the COP and TXU stocks here.

Thanks for your opinion. That's all I really want, different opinions so I'll have a place to start my own thinking from.

It's interesting to think that the gov. might try to prop stocks up.

Anybody else?