Wednesday, December 17, 2008

Could the Dow drop to 6,000?

I wish I could say NO! But I can’t.

So far the gurus of the investing world have called about a dozen bottoms since the downhill slide began. But they’ve been wrong every time. Every time! And when I hear them saying, “It’s different this time,” it makes me cry. A low-volume move up from the lows lacks any sort of conviction. Bailout after bail the job losses continue.
All the desperate moves coming out of government mean one thing and one thing only: The economy continues to deteriorate at an incredibly alarming pace. And we’re not about to get any lasting stock market rally until mid-2009, at best.

The next stop on the downside? Sadly, we could easily see 6,000 on the Dow.

At best we are stuck in a tiresome holding pattern – one that raises false hopes, only to dash them again and again. Until all the bad news is out. Until someone else is lending money other than Uncle Sam. Until businesses start hiring and consumers start spending again. Until then, we will probably see bear market rallies; but then the inevitable busts will continue.

Has investing changed? Buy-and-hold stocks? Own the indexes and never give it a second thought? Invest in big companies, because they’re safe?

Sadly not anymore. A passive approach now virtually guarantees losing money. You must actively manage your portfolio. That includes discarding any long-side bias for the moment and taking advantage of opportunities for money-doubling gains on the short-side.

It’s time to trade on the short-side of the market, using easy-to-execute strategies to build wealth from stocks that go down. Short-side investing is not just a bear market game. Even in good times, there are plenty of bad companies with outdated business models, lousy products, and crummy service that get their heads handed to them by the competition.

In 2007, an up year for the markets, short-side investors enjoyed scads of winning trades, banking gains of 37%-312%! Some even doubled their money or better. In 2007, you could have earned fat short-side gains – and the same goes for any year – to supplement your long-side winnings. In times like these, it’s a feast of profits.

How to do short-side investing.

I never suggest shorting stocks directly - the risks of “naked shorting” are much too high. Instead, buy stock options. Options leverage a small move in the underlying stock into big gains while minimizing the risk. You could trade put options to earn huge winners in losing stocks. Best of all, it’s easy. All you need is an account with a good options broker. These days trading online is inexpensive.
Here are some trades I heard of:-

$2,000 in a Dell trade turned into $4,420 in 18 days. $3,000 in Sears trade turned into $6,690 in 15 days. $5,000 in a Nordstrom trade turned into a $10,550 profit in 9 days. $7,000 in a Retail HOLDRs trade turned into $15,050 in 4 days. $10,000 in a Patterson Companies trade turned into $21,200 in 2 days.

In percentage terms many traders in put options have already doubled their money or better over 57 times during 2008. As the housing sector cratered earlier this year, they banked fat gains from everything related to that crisis in confidence, including 121% gains by trading materials supplier Masco, 152% gains from Home Depot and 175% gains from mortgage giant Countrywide Financial.

As consumer confidence took its first big dip after last year’s holiday season, many bet against the retail sector for 155% gains from Liz Claiborne, 100% gains from 99 Cents Only Stores and 137% gains from Martha Stewart.

Then as the financial contagion spread, banking sector trades generated even more big profits like 179% gains in a Citicorp trade, 146% gains from the Financial Sector Spyder, 285% gains from Bear Stearns, and as the U.S. economy continues to tank, the beat just goes on and on, across the board, for profits like 100% from Sun Microsystems, 115% from Wachovia, 108% from Patterson Company, 109% from Amgen, 114% from Bank of America, 202% from Sovereign Bancorp; and more.

The Carnage Isn’t Over!

The US and global financial system will NEVER be the same again. You’re kidding yourself if you think otherwise. What started as a sickness in the housing sector has morphed into a full-blown epidemic, one that has spread through the economy like the 1918 killer flu.

Consumers have nothing to spend. Banks have nothing to loan. Businesses don’t want to invest or hire. Their sales are sinking. Their profits have evaporated. And their stocks are toxic.

This market downturn is far from over.

The Feds just revised 3rd-quarter GDP to a negative 0.5%--with the 4th quarter expected to be worse. Durable goods orders plunged 6.2% in the latest report. We’re looking at the worst job losses in 3 decades. And manufacturing has collapsed across the globe. At best, we’re looking at the longest, deepest slide since the Great Depression.

So for investors, there’s no choice but to consider trading on the short side as well. Sure there will be up days for the markets, but that will just give even more opportunities to profit. I think we could easily see the Dow at 6,000 or lower before we’re done.
And when the tide finally turns, you could still be making plenty of money on the short-side. Investors should not just focus on the macro economics but also on the fundamental outlook of individual companies. And you can’t just put lipstick on these pigs. Some companies are destined to falter--even in the best of times.

Over the next 12 months, or so even if the Dow does not quite drop to 6.000, there’ll be many companies for the picking. Even a small investment can grow in a hurry.END