(Almost) Last Chance to Get out of Stocks

[powayseller]

I’ve been writing for at least a month that now is the time to get out of stocks. If you’ve got any money in equities, make sure you have a good reason. If you’re in mutual funds, index funds, any stocks at all, consider selling before the big sell-off. I moved all retirement and non-retirement money into CDs paying about 5%. You can put retirement money in CDs. Maybe first you have to move it to a brokerage account, such as offered by Vanguard. I feel as compelled to say this as I do telling people to sell their homes. Housing and the economy are strongly linked, and feed on each other. There are plenty of investors and advisors who share my view.

Now, on to the article which sparked this thread. Let today’s WSJ explain my logic:

As housing goes, so goes the U.S. economy — and the stock market.

Sure, the stomach-churning downturn in the last several sessions — in U.S. stocks and then the bubblicious commodities markets — was fast. But it wasn’t surprising. The things that should have mattered didn’t for the longest time, and now suddenly they do….

The rapid recent swoons are only the latest evidence of how dominated the markets are by aggressive speculators, especially the trend-following hedge funds that play the futures markets. These funds have been whipsawing the global markets, researcher Bridgewater Associates pointed out in a note this week…..

Some investors are catching on. Home Depot’s shares gave up more than 5% yesterday as investors grew wary about the company’s strong forecast….

Housing has driven consumer spending and boosted employment during this upturn. There are signs that the housing slowdown is having an effect on both….Not coincidentally, there was a slowdown in consumer spending. Mr. Kasriel writes that, if the April level of retail sales, excluding gasoline purchases, persisted through the next two months, the quarter would have a mere 1% rise, compared with over 14% in the startlingly strong first quarter.

[Anonymous]

You know that I agree with that, as per my per my charts on my blog last week. This selloff did not come out of the blue at all, it was as obvious as one can be in advance.

[PD]

How low is it going to go? I’m quite happy I liguidated most of my investments. However, I still have a good chunk in the market. I’ve discovered that it can be easier to find a good investment than knowing when to sell it! I’m trying to get better at that part.

[Anonymous]

You may be right about the general stock market sell off. Really, the broad US market hasn’t been profitable in the last few years anyway. Had to be in international, energy or certain sectors (or better yet real estate).

So if you are convinced stocks are going to go down, then the obvious strategy is to short the stock market, either directly or via inverse funds from Profunds or Rydex. 5% return is really conservative, barely more than inflation. If you are certain stocks are going to tank then you can do a lot better.

The most obvious strategy for those of us on this blog who believe we are approaching a monumental real estate bust is to short housing stocks. In my opinion this is an absolute no-brainer. I’ve been in since Jan06 and already up over 30%, it’s only going to get better over the next couple years. The only drawback to this strategy is you can’t short with your retirement funds. The closest option I’ve found is the SRPIX fund, which is a real estate short fund but unfortunately it doesn’t really track the homebuilder stocks

The ideal situation is for those who sold real estate recently and have been renting, they are sitting on cash which they can invest in anything. And right now, you might as well put some of that money in put options and shorts of homebuilders. You made money on the real estate rise, why not double the pleasure by profiting nicely on the inevitable crash?

[PD]

I’ve been considering buying some Puts. I suggested the CD thing only as an example of safe investment for the other poster. I would not recommend shorting or buying options to someone who does not understand the stock market. I used to have a stock brokers license (altough I did not work as a financial advisor). People can get into big trouble with options. However, buying real estate puts seems pretty smart to me right now. I’m kicking myself that I didn’t do when I first started thinking about it.
I also think Home Depot and other home improvement companies are going down – as well as luxury goods and services.

[powayseller]

SRPIX is invested in inverse of REITs, and does not track inverse of homebuilders at all. We’ve been through this topic before.

I would like to short the s&P and the homebuilders, but don’t know how. I will seek the advice of Chris J for this.

My retirement account is with Vanguard, in a brokerage account. I can buy anything I want. If you are limited in your options in your current account, move to Vanguard. When my husband worked for U-Haul and had only 5 options, I moved his money to Vanguard every quarter, and from there, the whole world was open to me! This is the biggest secret in 401k planning – your employer hates it when you handle your own funds, bec. their company hired sponsor doesn’t get the money. Do this: put all your 401k money into a money market, no load, and your company plan advisor gets no cut. Every month or two, move it to Vanguard or another brokerage account (IRA or 401K rollover). Buy stocks, index funds, mutual funds, commodities, whatever you want. Even CDs. I angers me that companies are manipulating their employees by not explaining this option. Every employer should offer a Vanguard type brokerage account for their employees. It’s highly unethical to limit investment options.

[speaker]

Poway,

are you referring specifically to US equities? I have serveral mutual funds spread across domestic and international markets.

I have been unloading shares in my mutual funds over past couple years just for my own personal reasons and not because of any market analysis.

What would be some reasons to unload say european stock or Asian stock? Is it just stock in consumerable companies that should be unloaded?

Also, if the equity market as a whole takes a plunge then this would be an AWESOME time for someone like me (30ish) to load up on equities in my 401k. After all, I wouldn’t hit my 401k until retirement many, many years from now. Agreed?
thanks
“End of line.”

[4plexowner]

Don’t get carried away with puts.

I lost about $8K in 2004/5 with puts that expired worthless.

I am confident that the equity markets are headed much lower. My target is 3000 on the Dow.

HOWEVER, we are living in a country where most if not all financial markets are controlled and manipulated.

The Plunge Protection Team (also known as the Working Group on Financial Markets which was authorized via Executive Order 12631), uses your tax dollars (and money hot off the printing presses) to “manage” the markets and keep them “orderly”.

Eventually this manipulation (oops, I mean “management”) will be overcome, but in the meantime – be careful!

[PD]

I am not going to buy a ton. I’m also fully versed on the risk. One thing I’ll never do, however, is go short.

[powayseller]

I am not knowledgeable about investments overseas. I only know that the US economy is dependent on consumer spending, the consumer is dependent on housing appreciation to keep taking out money. Once housing stops rising, the consumer pulls back, and companies’ profits will fall, and stocks will fall. Also we have rising inflation and interest rates which are pressuring the markets.

Some believe that China will keep growing, even without the US consumer. Others believe China is dependent on exporting to us.

To be on the safe side, I sold all my equities. Perhaps you can make money in global funds. But which ones?

I am going to try Chris J’s trading system. I need $10K to open an account at a futures brokerage, and will get the orders off his website. It involves only 1-2 trades per week, which I call in to my broker in the morning. I hold it for several days, and then execute a sell. Simple enough. His method is up 60% this year, and he wins 90% of his trades. I am also trying some of the advice from the Zeal newsletter; they suggested a lead mining company in Canada. Yakamoto Forecast is recommending 100% cash position. But I will use a small amount of my money as play money in the bond futures (Chris J’s site) and commodities. Also may get Rydex Short funds, and some gold bullion after the pullback. It makes sense to hold a couple percent of assets in physical assets.

Perhaps money can be made in pawn shops, and others which prosper during recessions. Problem is: P/Es are over 25 for Proctor & Gamble and all publicly traded pawn shops. Isn’t there any good deal in the stock market these days? The whole darn thing is so overvalued right now.

I agree when equities fall we can get back in. Everything is cyclical. I was just pointing out that we are at the top now.

[powayseller]

What puts do you recommend? I’d like to learn more about puts.

[PD]

I have not nailed down which ones I’m going to buy yet.

[Anonymous]

For starters select any 5-6 of the largest homebuilder stocks and you can’t go wrong.

Fidelity web site has some good tutorials on options trading.

[Anonymous]

Short sales are easy, just need a non-retirement brokerage account. Talk to Fidelity, TD Waterhouse, etc. they can help.

The limitation is you can’t short from your retirement accounts. Also with shorts your potential losses are theoretically infinite (or up to the point you get a margin call) if the stock keeps going up and you are not paying attention.

With housing stocks I do not see much long term risk in shorting. I acknowledge that there is clearly manipulation in the market with plunge protection team, stock buybacks, etc. that cause short term volatility. But realistically, does anyone on this blog actually believe there is any chance a homebuilder such as TOL will be higher in 2 years that it is today? I realize nobody can predict the future but lets be serious.

[powayseller]

Homebuilder valuations are low, and they’re sitting on lots of cash. Value investor Bill Miller just loaded up on them. WIth shorts and puts, don’t you need precision on the timing and amount of the drop? I think they’re already discounted, and we don’t know how much they can improve their position by consolidating, share buybacks, land selloffs, and other gimmicks. Too risky for me, since I’m not a sophisticated trader, and I see what can go wrong with a trade like this, even though the idea is good.

[Author]

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