Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Gold Price Trend Validation - 22nd Aug 19
Economist Lays Out the Next Step to Wonderland for the Fed - 22nd Aug 19
GCSE Exam Results Day Shock! How to Get 9 A*'s Grade 9's in England and Maths - 22nd Aug 19
KEY WEEK FOR US MARKETS, GOLD, AND OIL - Audio Analysis - 22nd Aug 19
USD/JPY, USD/CHF, GBP/USD Currency Pairs to Watch Prior to FOMC Minutes and Jackson Hole - 22nd Aug 19
Fed Too Late To Prevent US Real Estate Market Crash? - 22nd Aug 19
Retail Sector Isn’t Dead. It’s Growing and Pays 6%+ Dividends - 22nd Aug 19
FREE Access EWI's Financial Market Forecasting Service - 22nd Aug 19
Benefits of Acrobits Softphone - 22nd Aug 19
How to Protect Your Site from Bots & Spam? - 21st Aug 19
Fed Too Late To Prevent A US Housing Market Crash? - 21st Aug 19
Gold and the Cracks in the U.S., Japan and Germany’s Economic Data - 21st Aug 19
The Gold Rush of 2019 - 21st Aug 19
How to Play Interest Rates in US Real Estate - 21st Aug 19
Stocks Likely to Breakout Instead of Gold - 21st Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 21st Aug 19
WAYS TO SECURE YOUR FINANCIAL FUTURE - 21st Aug 19
Holiday Nightmares - Your Caravan is Missing! - 21st Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19

Market Oracle FREE Newsletter

The No 1 Gold Stock for 2019

How to Respond to the Inevitable Stock Market Crash in 2010

Stock-Markets / Financial Crash Dec 21, 2009 - 03:46 AM GMT

By: FleetStreetInvest

Stock-Markets

Best Financial Markets Analysis ArticleTheo Casey writes: ‘Cautious’ is my watchword for 2010.

The reason for my caution is because the bull market was illegitimate. It wasn’t a response to economic growth or corporate outperformance. The rally happened because central bankers made it happen. Don’t get me wrong, the multi-billion pound stimulus Bernanke, King and the rest of the world’s central bankers heaped upon the market has been a blessing. It’s driven our investments to record levels.


However, it’s unsustainable. When rates go back up, markets will go back down.

Let me explain how the ‘carry trade’ has driven the stock markets…

The carry trade was the cash cow of big City trading strategies. To execute a carry trade, you simply borrow in a low interest rate currency and buy a higher yield currency. The difference between the low yield you pay to borrow and the high yield you receive for your purchased currency is your profit. For example, if you had borrowed yen, you would pay around 0.5% to borrow currency. You take that borrowed currency and buy Australian dollars yielding 4.5%. Assuming that the rates on both currencies are unchanged, you receive 4% of free money.

It really was as simple as that.

How the carry trade spread

Carry trades are not limited to the currency markets.

The strategy can be used to buy assets and when the US and UK cut rates to near zero, that’s exactly what happened. Traders have been borrowing at zero and buying… anything.

It’s been like Christmas everyday. When City traders can borrow at zero and buy government bonds yielding 3.5%, stocks yielding 5% and corporate bonds yielding 7%, it’s little wonder that all of these asset classes has risen simultaneously this year.

It’s easy while the going is good, but rates have to rise some time.

We need to be prepared for when the party stops…

Three steps to a safer portfolio

It will probably come as a surprise, but if the market is going to fall, we just advise that you let it…

Shorting the market, the conventional way, is a mug’s game. If you try and short the stock market as a long term trade you will spend more time losing money than making it. Put simply, the market trends up. Stocks spend a longer amount of time rising than they do falling.

When stocks fall, they tend to fall very sharply in a short space of time.

Calling those downturns is difficult. So we need to be defensive another way.

What do we recommend?

First step, sell your most cyclical holdings.

The priorities of the defensive investor should be to protect your wealth before looking for more. In my subscription newsletter, I’ve taken big profits in some very cyclical and volatile positions. It’s essential to bank profits when the opportunities present themselves.

It’s this ethos that means the first thing you should do when rate rises are back on the cards is to protect what you worked so hard for. So it’s time to think about your highest performing stocks. When markets turn back again, get out of any cyclical holdings you have or prepare to take heavy losses.

The next step is to take those funds and buy defensives and gold.

The case for defensive stocks often falls on deaf ears when the markets are rising. But 2010 will not be like 2009. There are still many big, cash-rich, high yielding blue chips that are worth your money. We recommend moving into the likes of Tesco, Imperial Tobacco and Vodafone when the market turns south.

As for gold, the yellow metal will take up its familiar role as a jolly good hedge when the rest of the world is falling to pieces. In 2008, it was certainly a better place to have your money than in cyclical stocks and so we expect it to prove once again.

The third step, believe it or not, is to buy back into cyclicals.

Buy on the dips. It’s an oldie but a goodie. Once the markets fall sufficiently, delve into the market and pick up cheap businesses.

I highlight ten such opportunities in a recent piece for The Right Side. Aggressive, but currently overvalued opportunities like Burberry, ICAP and Tullow Oil. Too pricey at present, but could be very attractive come the correction.

Hoping for the best, but preparing for the worst. Our three steps are a sequential step down in risk and reward and then back up again. Selling at highs and buying on dips sounds easy on paper though. We will need our wits about us and watch the markets very closely to get these ones right. Rest assured that we’ll let you know when to act.

Watch this space.

Best wishes,

Theo Casey
For The Right Side

Editor's note:

Keep your eye out for this generous offer

Just before you go, here’s something to keep an eye out for. Very soon you are going to learn of a very generous offer.

On Monday 21st December, if you act swiftly, you will be able to get a great deal on a brand new book called Liquid Millionaire. It’s a book that I’ve seen highly recommended.

You’ll get a great chance to see what all the fuss is about. We’ve secured an offer for you to pick up this investment bestseller for just 99p instead of the £22 recommended price.

But… there is only a limited supply of 99 books, so please be quick.

Frank Hemsley,
Editor
For The Right Side

http://www.fleetstreetinvest.co.uk

If you enjoyed this article then we encourage you to sign up for the free ‘The Right Side’ eletter. Learn what you can expect from today's markets -- and how to prosper in the face of uncertainty. You won't find more thought provoking writing anywhere on the Internet.

Copyright 2009 © Fleet Street Publications Fleet Street Daily is an unregulated product published by Fleet Street Publications Ltd. Information in Fleet Street Daily is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Appropriate independent advice should be obtained before making any such decision


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules