Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

How to Respond to the Inevitable Stock Market Crash in 2010

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

By: FleetStreetInvest


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,
For The Right Side

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 - 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