Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Why Most Investors LOST Money by Investing in ARK FUNDS - 27th Jan 22
The “play-to-earn” trend taking the crypto world by storm - 27th Jan 22
Quantum AI Stocks Investing Priority - 26th Jan 22
Is Everyone Going To Be Right About This Stocks Bear Market?- 26th Jan 22
Stock Market Glass Half Empty or Half Full? - 26th Jan 22
Stock Market Quoted As Saying 'The Reports Of My Demise Are Greatly Exaggerated' - 26th Jan 22
The Synthetic Dividend Option To Generate Profits - 26th Jan 22
The Beginner's Guide to Credit Repair - 26th Jan 22
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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