Brian Wesbury

In December of 2009 I reviewed Brian Wesbury's book It's Not as Bad as You Think and gave it a five star rating, but didn't agree with what he was saying because he thought the market was going to rally in 2010 and into 2011. This was at a time when pessimism was rampant on Wall Street, and out of the two dozen or so finance and economics books I read during the latter part of 2009 and early part of 2010, he was the only author except for Steve Forbes that put a positive spin on the markets. Well, kudos to Mr. Wesbusry for being dead on with his assessment. In It's Not as Bad as You Think Wesbury states the DOW could reach 14,000 in the not too distant future. According to his blog First Trust Economy and watching him on CNBC, he is still bullish on the markets for 2011. If you would have taken his advice when he was the lone wolf out in the wilderness, you would have profited handsomely. I just wanted to give him a shout out for not only being right, but taking a gutsy stance.

I haven't been posting any updates to The Ithaca Experiment for a few months because I am still short the market and didn't want to be repetitive like Chicken Little chirping "the sky is falling" over and over again. The market had a very good 2010, especially since September when the rally seemed to have snowballed into a very nice year for those that are long equities. Do I regret being in leveraged short ETFs? No I don't because I still believe that there will be a day of reckoning with the massive debts that governments have accrued - especially in the "civilized" world.

This portfolio is a multi-year holding, just like most of my positions when I was long equities during the 80's and 90's and most of the double aughts. I don't like to sell for tax purposes, and statistics show frequent trading is not good for your bottom line. It is very difficult to time the market so I need to follow my gut instincts. As long as I don't panic and sell anything, all I have are paper losses. I have to be patient and wait it out as long as I remain solvent in my ETF holdings. My positions in ProShares Ultra Short S&P 500 (SDS) will be less of a problem of staying afloat than my holdings in the Direxion Small Cap Bear 3X Shares (TZA) because the former is double leveraged whereas the latter is triple leveraged. In fact, my allotment of shares in the Direxion Small Cap Bear 3X Shares (TZA) have already done one reverse split since I've owned them and may in fact do that again if the price falls to hat sizes once more. I have thought about selling them, but they are a small percentage of my portfolio, and, I believe they will get me to break even point eventually, or pretty close to it. I'm going to just let it ride as they say in the casinos.

September Song

The markets are roaring today. Up almost 250 points at this writing on better than expected manufacturing numbers, plus riding the coattails of upbeat sessions in Europe and Asia. Rick Santelli on CNBC was quick to point out that August had a terrific opening, too, up 209 points on day one, but you know what happened in August if you've been following the markets. They experienced their worst August performance in almost a decade. Dog days they certainly were if you were long the market. According the the Stock Trader's Almanac talking about September: "S&P opened strong 11 of the last 14 years but tends to close weak due to end-of-quarter mutual fund portfolio restructuring.". In fact, September tends to be the worst month for the markets. This does not mean that the markets can't go up for the month, because they have before, but the probability that they will decline is historically compelling.

Merger and Acquisition activity has been dominating the headlines in the Wall Street press the past month. The bulls believe this is an indicator that the market has reached rock bottom and that this is a good time to be buying. I take the bearish stance and say that increased M&A activity puts pressure on the markets primarily because consolidation of the two companies will have to take place and this means layoffs. Less jobs means less houses will be bought and even less iPads will be in stockings hung by the fireplace come Christmas time. There is also the argument that the company being scooped up may think that their stock has no place to go but down so these lofty prices they get by being bought out is the best thing that could happen to them. Let's not forget that with M&A the acquirer needs to bolster growth from outside the company because it can't grow organically. That to me is a sure sign that things are slowing down for these behemoth blue chips that are in vogue right now because of the dividends they pay out.

I've got nothing against dividends, but some buy-and-hold-forever stocks like General Electric (GE) and JP Morgan Chase (JPM) drastically slashed their dividends two years ago. I will grant you that their ticker prices have increased considerably since March of 2009, but you made money only if you bought them at the right time. It's just not that easy to time the market. If General Electric (GE) and JP Morgan Chase (JPM) don't make you shudder when you think about the dividend income lost, just consider other market stalwarts like General Motors and Lehman Brothers. That's a world of hurt if you banked on those widow and orphan enterprises. I really believe we are in only the second or third inning of the 'Great Recession' or whatever you want to call it. A year and a half is just not enough time to correct the biggest financial fiasco since the 1930's.

The Hindenburg Omen

There was a major blip on most traders radar screens this weekend in that a Hindenburg Omen observation occurred last Thursday, August 12th. The financial blogosphere was lit up with articles and posts about the occurrence, but if you want a detailed account of what I consider to be the best article on the subject, go no further than Robert McHugh's "The Recent Hindenburg Omen Observation" at http://www.safehaven.com/. In order not to poach too much of Mr. McHugh's material, I'll keep my descriptions brief and liberally quote him, so here goes his explanation of what exactly is a Hindenburg Omen: "It is the alignment of several technical factors that measure the underlying condition of the stock market - specifically the NYSE - such that the probability that a stock market crash occurs is higher than normal, and that the probability of a severe decline is quite high."

According to Wikipedia, the criteria for a Hindenburg Omen: "...are calculated daily using Wall Street Journal figures for consistency.". The criteria are: "1)The daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows are both greater than 2.2 percent of total NYSE issues traded that day. Based on approximately 3100 NYSE issues, the 2.2% threshold is 69. 2) The NYSE 10 Week moving average is rising. 3) The McClellan Oscillator is negative on the same day. 4) New 52 Week Highs cannot be more than twice the new 52 Week Lows (though new 52 Week Lows may be more than double new highs).".

How high of a probability is there that a crash will happen? First, there has to be more than one Hindenburg Omen occurrence in 36 days for there to be considered a real possibility of a retreat in the market, swiftly or gradually. But if there is, McHugh points out: "there is a 30 percent probability that a stock market crash - the big one - will occur if we get a confirmed (more than one in a cluster) Hindenburg Omen. There is a 40.8 percent probability that at least a panic sell-off will occur. There is a 55.6 percent probability that a sharp decline greater than 8% will occur and there is a 77.8 percent probability that a stock market decline of at least 5% will occur. Only one out of roughly 13 times will this signal fail."

Both The Wall Street Journal and Art Cashin on CNBC had pieces on the Hindenburg Omen this week, so it's not really a far flung notion that a few lunatic fringe traders are drumming up on bulletin boards at the major financial Web sites. As Cashin stated on Monday, "We've never had a heavy sell-off without a Hindenburg Omen, but we've had Hindenburg Omen's without a sell-off.". With this August being a particularly light on volume, even for August when most professional traders are vacationing, it's difficult to tell what will happen, but it does signal caution because market internals are deteriorating. I won't have to keep too close of an eye on this because if we do get a confirmed Hindenburg Omen, it will be all over the financial blogoshpere, not to mentioned the mainstream financial press. This could be another catalyst for the downturn I've been looking for that will surely turbo charge my portfolio.

Swinging for the Fences

If you've been following this blog, you're aware that I expect a major correction, if not a market meltdown, and feel my short positions will make for lucrative investments in the next year or two. On a personal note, most of my money is in cash right now, sitting in CD's which aren't earning too much interest, to take advantage of what I perceive to be a once in an eon market implosion that we haven't seen the likes of since the 1930's. The Ithaca Experiment Portfolio is exactly that, an experiment, but it is my own real money I'm tracking, and I could conceivably make a killing not only shorting the market to the downside, but playing the bounce on the way back up.

Market sentiment still remains bullish in many camps and not only do my short positions seem foolhardy from that perspective, but so do my cash positions if you're from that ilk. I keep hearing phrases from the guests on CNBC like: "You can't make any money by being in cash and bonds are overvalued so your best bet is to be in stocks.". Sure bonds may be overvalued but, I couldn't disagree more with the stances on cash and securities. If the market declines again, either in a slow and grinding rewind or by cascading downward off a cliff caused by high-frequency trading, being in cash would be your best bet because of preservation of capital.

The Great Recession is not over yet. In the August 7th issue of The Economist in an article entitled A Deeper Hole, the author states that "the recession was even worse than everybody thought" based on data revisions by the Commerce Department. The article goes on to say that: "These changes confirm the recession as the worst of the post-war years.". To give a historical perspective, the post-war years do not mean since the end of Desert Storm, but the end of The Big One, World War II. Sure, the Market lost considerable ground from late Summer 2008 to March of 2009, but that was only for a few months. Do you really think the worst financial calamity since the 1930's would be over in a blink of an eye? It has only been two years since the Fall of 2008, and if the 1930's or 1970's are any indication of what's to come next, we've only got more volatility to go. The trend is flat or to the downside.

I believe that many of the bullish analysts are too myopic in their assessments of the market with time horizons that go back only 20 or 30 years. Despite the crashes in the market from 1982 to 2008, you made damned good money by being fully invested in S&P 500 or DOW index funds with a buy and hold investing strategy. The NASDAQ is a different story, but you get my drift. Those days are over.

Let's not forget that the FED came out last week and stated the economy would be under pressure for the second half of 2010. That, coupled with bellwether global technology firms Cisco (CSCO) and IBM (IBM) saying that growth would be muted going forward for at least two quarters gives one time to pause. Who do you believe, the majority of CEO's that are giving rosy earnings estimates going forward? They have nothing to gain by being negative on the market becuse they are judged by the price of their stocks. Cisco CEO John Chambers is a straight shooter and has a track record making market predictions based on his perceptions of where the market is going by checking his channels of his well oiled machine. I listen to what he has to say very carefully. So for the mean time, it's steady as she goes.

The Opening Act

Since my last posting in late May, the DOW is up roughly a meager 250 points. If you are a buy and hold investor, you made a little money. If you traded the volatility, and traded it right, you could have picked up a substantial amount of coin. However, we all know that timing the market is a dangerous game and rarely do your profits coincide with the roller coaster rides of the technical charts - at least on a short-term basis. Before I go any further, let's examine some recent market history.

It was the worst May since 1940 for the stock market, dropping about 8% for all three major domestic averages. The Ithaca Experiment portfolio was up 15% for the month because it is both leveraged and short. Some people advised me to ring the cash register, take my losses, lick my wounds and buy then while stock prices were low, but I believe the market is going through more than a bad stretch. I decided to bide my time. June was another down month so my portfolio was up. Then July came and wiped out all of my gains from the previous two months from the substantial rally we experienced. We are now almost halfway through August and I'm back where I was three months ago.

There is a dichotomy in the market now. It seems you either believe that the market is going to retest the bottom of March 2008 or worse, or, you think that this is a generational buying opportunity for quality stocks. If you think you can cherry-pick high quality blue-chips now, by all means do so. Personally, I'm going to sit back in my short positions and wait. From what some market pundits are saying, my war chest will be significantly larger in a year or two from now if I am patient and bide my time. I'm from the camp that says we've already reached our highs and the next steps are much lower than this. There are too many headwinds now for the market to make another upside move, at least in my humble opinion.

I don't want to known as the boy who cried wolf or the broken clock that gets the time right twice a day, but I'm still singing my same tune of a double dip recession. In fact, I don't think we're even out of the Great Recession yet. I believe that during the last year the market has been propped up by traders with a technical bent, not anything based on solid fundamental analysis. I realize my short positions are down significantly in the year since I bought them, but with a long-term investment horizon, I still feel I will be vindicated in the long run. Wall Street tends to take August off, which is why the trading volumes are so low this month, but we are almost through the dog days and September will be here before you know it. By the New Year, I expect the market to be much, much lower. If it is not, I would have to reassess my position and consider going long.

Shooting Dirty Pool

You can feel the populist rage against the machines of Wall Street and Washington these days and rightfully so. Taxes are going up and 401Ks are going down, sometimes faster than expected like on May 6th when the "flash crash" occurred. Big drops in the market scare people, especially when it leads on the evening news. Originally dubbed the "fat finger trade" because the speculation was that somebody on a trading desk put in an order to sell billions of dollars work of Proctor and Gamble (PG) stock instead of millions of dollars. That theory has been ousted for the belief that flash trading was the culprit. The terms flash trading and high-frequency trading have been bandied about ever since the May 6th drop and not to be confused, flash trading is a form of high-frequency trading and an examination of the two is warranted.

A great many Main Street investors think that your run-of-the-mill pikers on day trading desks can move the market up or down 1,000 points in the bat of an eye, but that's a modern myth. High-frequency trading now moves the market because according to Wikipedia "it now accounts for 73% of U.S. equity trade, although the firms involved constitute only 2% of trading firms.". Day traders have nothing to do with high-frequency trading. They don't have the computer power to be in the mix. Investopedia gives a definition: "High-frequency trading is an automated trading platform used by large investment banks, hedge funds and institutional investors which utilizes powerful computers to transact a large number of orders at extremely high speeds. These high frequency trading platforms allow traders to execute millions of orders and scan multiple markets and exchanges in a matter of seconds, thus giving the institutions that use the platforms a huge advantage in the open market.".

I've got no beef with high-frequency trading. It's a natural evolution of the use of computers in the stock market. It's a very clever idea invented by a clever man by the name of Ed Thorp who is the godfather of all quants. Back in the 1960's he wrote the seminal high-frequency trading book Beat the Market: A Scientific Stock Market System where he discussed the use of mainframe computers in taking advantage of the anomalies of the inefficiencies in the market. Arbitrage is another word for this. What I object to is a subset of high-frequency trading called flash trading, hence the term "flash crash" coined to describe the events on May 6th.

Again, our friends at Wikipedia will provide us with a quick definition: "Flash trading is a controversial practice of some financial exchanges whereby certain customers are allowed to see incoming orders to buy or sell securities earlier than the general market participants, typically 30 milliseconds, in exchange for a fee. With this very slight advance notice of market conditions, traders with access to extremely powerful computers can conduct rapid statistical analysis of the changing market state and carry out high-frequency trading ahead of the public market.". As you can see, Wall Street insiders get the inside tract as to where the market heading. I know life is not fair at times, but this is way out of whack in terms of the game according to Hoyle. It's not a level playing field for the small investor. Now you may be wondering how flash trades can take place when there is regulation by the FED. The answer is that they trade in dark pools which are unregulated.

Venkatachalam Shunmugam posted a recent blog on voxeu.org which discusses dark pools and states: "Dark pools are a private or alternative trading system that allows participants to transact without displaying quotes publicly. Orders are anonymously matched and not reported to any entity, even the regulators. Thus, the mainstream exchange-traded market does not have any clue about the volume of transactions happening in this parallel market or the prices at which they are being executed.". In other words, not only does the little guy have an unfair disadvantage, but so does a lot of the smart money. "According to the Securities and Exchange Commission, the number of active dark pools dealing in stocks on major US stock markets trebled to 29 in 2009 from about 10 in 2002. For April to June 2009, the total dark pools volume was about 7.2% of the total volumes of all US exchanges.", Shunmugam informs us earlier in his post. As we can surmise, flash trading is just getting more popular, which does nothing for market stability. There is nothing cooking in Washington in the near term future to regulate these dark pools. Expect more market volatility and large, unexpected moves to the downside until the playing field is leveled.

Casino Boogie

When you are short the market and get a 10% correction from the April 23rd highs, it can really put steam in a man's stride, especially when you are leveraged like I am. However, here's the rub: I began adding short positions to my portfolio in April of 2009, taking a sizable paper loss. I didn't go in all at once, but my investing acumen as well as my patience have surely been tested. Just doing back of the envelope calculations, I figure I need the DOW to get back to 8,000 before I start playing with the house's money. You may think I look like a sucker ready to be fleeced, but I'm not going to welsh on my bets. I did my homework and followed my instincts and, when I first went short the S&P 500, I thought it was the right thing to do. In hindsight, I should have waited, but at the time I made my initial investment, I thought I was fine-tuning my portfolio to make a significant amount of money and I still do. I didn't play this fast and lose like many of these fly-by-night traders do, just following the hot money on a second-by-second basis. I've always been an investor, looking at the long-term picture, and what I see isn't pretty.

The market is cooling down after burning it to the wick for over a year. This is a fast-buck business and some of the indices like the S&P 500 have broken through their 200 day moving averages. This may not seem like a significant event to many retail investors, but it is. A daisy chain of mainframe computers are programmed to either sell or buy once an index hits a dynamic predetermined level like a moving average. This may have been what caused the "flash crash" on May 6th, and although the market isn't falling off a cliff today like it did in October 1987, it may have triggered a downward spiral that will last awhile. Star-studded panels of investment gurus will grace the television screens and the business newspapers about what will happen next, but they don't know any better than you or I do. If there is one thing I've learned about investing after 20 years of following the market religiously, it's that you're out on your own.

I've got a dim notion of what to do right now - just sit tight. It's the best thing I can come up with after getting humbled the past 12 months. Let's not forget that we've been down this road before in re to 10% corrections since the market lows in early March of 2009. This may be it and we'll get another pop to the upside. I don't want to be the boy who called wolf, so I'm not going to tell you that we are going to get a 20% or 30% correction or retest the lows or blast right through that resistance level. I've done that before and it will get you nowhere, especially since I've made my investing views public. What I will say is that the mission creep in the worldwide financial sector has gotten way out of control and sovereign debt crisis seems to be permeating the conversation both domestically and over in Europe. For the mean time, I'll keep a poker face and just watch things unfold.

Release the Hounds

Some current and former Goldman Sachs (GS) employees have a vexing problem right now - a Senate subcommittee panel. I tuned in yesterday and watched the investment bankers squirm and, for a moment, felt sorry for them, then remembered they are all multi-millionaires and get paid to take the heat. They were pretty cool customers, and I don't blame them. A slip of the lip and they could end up in stir somewhere down the road, especially when the SEC gets their mitts on them. One thing I got out of the grilling was that Goldman Sachs (GS) is probably not the only bank at fault, and there is plenty of blame to go around for other institutions too big to fail. These bankers will surely get cut down to size in other bare-knuckle brawls as the fraud unfolds. I also thought they should have put the senators on trial because the Senate is at fault also for repealing acts like Glass-Steagall and passing legislation that would allow people with no visible means of support to purchase homes.

The market sold off yesterday with a confluence of news in addition to the Goldman Sachs (GS) sideshow. Most notably is the ongoing story that some of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) may default on their bonds. The main focus right now is on Greece, but Portugal may be the next to go causing a cascading of bad debts across Europe. I'd tell you that this will cause the correction I've been looking for, but my short theory has been shot full of holes so far. This market has got it going on, and although the shorts had a good day yesterday, it's been eight straight weeks up for the DOW and doesn't look like it is anywhere near winded. Although the DOW, NASDAQ and S&P 500 have had enormous gains since the lows of March 9th, 2009, it is the Russel 2,000 that has moved the highest on a percentage basis, more than doubling in 14 months, going from the low of 343 to reaching 741 last Friday.

I've got some skin in the game with the Russell 2,000 because I'm invested in the Direxion Small Cap Bear 3X Shares (TZA) which is leverages 300% to the downside of the Russell 2,000. If you have been following this blog, you are well aware my initial investment is down almost half since October of 2009. As foolish as it sounds, I'm still long this ETF because I firmly believe that we are in for more than a correction and the Direxion Small Cap Bear 3X Shares (TZA) will give me tongue wagging returns. This is because small cap stocks have a high beta and when the market goes up, you make a lot of money if you are long and lose a lot if you are short. The converse is true to the downside. When I say that I am long a short position, what I mean is that I am holding that stock or inverse ETF until I feel it is fully valued. Hopefully that will take longer than 12 months to take advantage of long-term capital gains. I lick my chops every time I look at the historical prices of the Direxion Small Cap Bear 3X Shares (TZA). At the market low on March 9th of 2009, the ETF was priced at $113.50. On April 23rd of this year, just a few days ago, it closed at $5.41. If we do get a double dip in the market, I can get close to a ten bagger if the market goes down in small increments.

The reason I need for the market to go down in smaller increments as opposed to crashing like we did in October of 1987 is because the ETF is priced on a daily basis and at roughly $5.50 a share, the Direxion Small Cap Bear 3X Shares (TZA) would only go up 100% to around $11/share if the Russell 2,000 would crater 33% in one day. A grinding correction, like the grinding rise we are currently experiencing, will give you a bigger bang for your buck. It's just plain old arithmetic. In the meantime while I'm waiting for the market to tank, I'll thank the SEC for putting Goldman Sachs (GS) in the spotlight. In the long run, this can't be good for stocks.

Pandora's Box

It's not quite time to strike up the band if you are short the market, but Friday's SEC charges against Goldman Sachs (GS) for fraud may have put the brakes on the market's rapid rise the last two months, if not last year, especially if you take into consideration the cockroach theory. For those not initiated with the cockroach theory, our friends at Investopedia will give us a quick definition: "A market theory that suggests that when a company reveals bad news to the public, there may be many more related negative events that have yet to be revealed. The term comes from the common belief that seeing one cockroach is usually evidence that there are many more that remain hidden.". Goldman Sachs (GS) is probably not the only bad actor in the drama that has been unfolding since 2008. The SEC may very well have their sights set on other ne're-do-wells in the investment banking community which only causes more distrust and angst on Main Street. Retail investors reluctantly coming back into the market was a big reason the pundits thought the market could ratchet up another leg. That is now a dubious proposition. The genie is out of the bottle.

There is that famous line by Gordon Gekko played by Michael Douglas in the movie Wall Street that goes something like: "If you want a friend, get a dog.". It's too bad we have to stereotype investment bankers this way, but a few bad apples at white shoe firms like Goldman Sachs (GS) have done a lot of damage to the IRA's, 401(K)'s and pension plans of many middle class Americans. No matter how well-heeled these bankers are, they should be held accountable for the damage they've done. Just when the market is going gangbusters and people are recouping their losses, the SEC has a score to settle and this is going to take us back to square one. At least that's how I see it. It may not happen overnight. It may very well take a few more months of treading water, but this market is going down. I don't want to rain on anybody's parade or sound like a Dutch Uncle, I'm just examining the facts and, fundamentally, the market is extremely overvalued. It just needed an excuse to correct and this may be the catalyst I've been looking for.

We all know that Mother Nature can be a cruel mistress, and another wild card here to stop the levitation of the market is the volcano eruption in Iceland. Air travel over most of Europe has come to a standstill - no imports, no exports, at least by airplane for the foreseeable future. That can't be good for business. Our economic relationship with Europe is no shotgun wedding. The short squeeze that took place the last two months that goosed the price of stocks may well be over. The locomotive may very well have jumped the tracks and diverged from the predicted path of DOW 12,000 by early Summer as some pundits have projected. You don't feel like you've been had with the volcanic eruption like you do with the Goldman Sachs (GS) grift, but still, it could very well put the market in give back mode. We'll see what happens this week. There are still a lot of earnings to go through and the market is sound according to the technicians. It is fundamentally where the market is weak such as the high P/E ratio and low dividend yield that I've been writing about.

Down at the Heel

Weekly jobless claims were released yesterday morning and it wasn't a pretty picture. As summarized in the Carnegie Management Group Hotline Report: "Weekly jobless claims rose by 24,000 to 484,000, and higher than the consensus estimate 440,000. The four-week moving average climbed by 7,500 to 457,750. Jobless claims are reverting back to an upward trend. The unemployment rate of 9.7 percent will also revert back upward and back above 10 percent soon.". You need jobs to sustain a recovery because without jobs, people will stop buying things, especially discretionary items. Let's not forget that 70% of GDP is consumer spending. Now, you may be saying to yourself that retail sales were good for March and you'd be right. But don't forget that Easter came early this year and personal savings rates are decreasing at an alarming rate. According to the Bureau of Economic Analysis (a division of the Commerce Department), personal savings decreased from 3.4% in January to 3.1% in February. This is down from 5% in the second quarter of 2009 and 4% of the third and fourth quarters of that same year. People are taking from Peter to pay Paul.

We have a long way to go before we are out of the woods in regards to the employment rate. Check out this piece of information by Daniel Gross from an article entitled "America's Back! The Remarkable Tale of our Economic Turnaround" in the April 19th issue of Newsweek: "To recoup the 8.2 million jobs lost since December 2007, it'll take four years of growth at 170,000 jobs per month. And by definition, it's hard to identify the next transformative economic force - the next steam engine or interstate-highway system.". Granted, we do have growth in the clean energy or green tech sector, but it is more of an evolution than a revolution. The same holds true for mobile Internet technology, whether it be hardware, software, services or the build-out of the infrastructure. The iPad may be a thing of beauty, but it won't be the cause of massive hirings nationwide as some pundits claim. We have an economy that is being propped up by the government and once it exits the picture, there will be nothing to sustain the rebound of the stock market. We just don't have the jobs to support it. It's a sleight of hand, now you see it now you don't illusion that the economy is doing well. As soon as the little guy, or retail investor climbs back into the market to reap big gains, it's going to crash and burn. Those days are almost upon us.

Humble Pie

Manning the lifeboats to abandon ship would be ludicrous now, but it is easy to surmise that I was too early to the party. The rally from the March 2009 lows has been mind numbing, and the market gains speaks volumes for the bull camp. However, I believe we are topping despite the good earnings news posted by some companies this first week of earning's season. According to The Helicopter Economics Investing Guide in an April, 13th post: "Yale professor Robert Shiller has just released an updated version of his historical PE chart for the S&P500. The current level, just below 22, is around the long-term market peak in 1966 and is higher than the PE before the 1987 crash. It is well below the 30 level reached in 1929 and the 44 level reached in 2000 though. Investors should assume that the current 22 number understates the actual PE ratio. Changes in accounting rules during the Credit Crisis have made corporate earnings much higher than they would have been, especially for the financials.".

I took the liberty of locating Shiller's chart on the Internet and sure enough, the S&P 500 P/E ratio of 22 is right on the money. If you are interested in viewing the chart along with other charts for the S&P 500, then go to http://www.multpl.com/. The data is courtesy of Standard and Poor's and Robert Shiller. Another chart they post is that of the S&P 500 Dividend Yield. I talked about the S&P 500 Dividend Yield in my April 2nd blog when Robert Prechter stated on CNBC that the dividend yield was 2.6, one of the lowest ever. Well, according to Shiller, the S&P 500 Dividend Yield is now 1.86, much lower than the 3 it registered on Black Tuesday in 1929 and Black Monday in 1987. The mean for the yield is 4.37% and the median is 4.3%. The lowest it ever registered is 1.11% in August of 2000. This is a bull market run that will end badly if history tells us anything. In fact, I still don't believe that this is a bull market run, but rather a bear market rally.

The facts speak for themselves and although it could be a rough April for the shorts because of year-over-year earnings comparisons, "sell in May and go away" is almost upon us if you adhere to that old Wall Street adage. I saw an interesting report by Bob Pisani on CNBC on Monday where he laid out the stated earnings and the estimated earnings for the S&P 500 from 2008 to 2011. In 2008 and 2009, the earnings for the S&P 500 were $49.51 and $56.86 respectively. In 2010 the estimated earnings for the same index is $78.12 and for 2011 is $93.55. That's a big leap in earnings from 2009 to 2010 - roughly a 30% increase. If we go by the P/E ratio of the S&P 500 using its current value of approximately 1,200, we get a figure of 15.3 if you go by the estimated earnings. That's in the ballpark when considering historical averages, but I don't think we are going to be growing 30% to 35% this year. I've seen some estimates for the S&P 500 for 2010 that are much, much higher than Pisani's figure of $78.12. So we'll have to see what shakes out.

Inside the Doomsday Machine

I thought I'd have something to crow about yesterday. Before the market opened, Christopher Rugaber of the Associated Press reported: "The Labor Department said Thursday that first-time claims increased by 18,000 in the week ending April 3rd, to a seasonally adjusted 460,000. That's worse than economists' estimates of a drop to 435,000, according to a survey by Thomson Reuters.". The market didn't like that news and the futures traded down. I thought I was on easy street for the day, especially when there are new worries that Greece may default on its debt, and if Greece defaults, there will be other sovereign nations to follow. Most specifically in Europe. After dropping down roughly 40 points the first two hours of trading, the market turned around at about noon with the news that the current currency crisis in China may be over.

The market just keeps going up and with earnings season on the horizon, there's no telling how much higher it can go. That's if we get good earnings reports. I'm a believer that the good news is already baked in the cake and we may get another correction as we did in January. For the mean time, I'll just watch the paint dry and not do any trading although it would be easy to cave under pressure. Once this market runs out of steam, all hell will break loose and it may fall faster than it ramped up. I'll just play the cards I've been dealt and stick to my long-term investing style. Being flexible and patient and not giving in to peer pressure are some of the themes covered in Michael Lewis' new book The Big Short: Inside the Doomsday Machine.

If you are not familiar with Lewis, he is probably the king of the jungle in nonfiction writing here in the US of A. Liar's Poker, MoneyBall and The Blind Side are some of his books you may be aware of. He's recently been featured on Bloomberg, CNBC and 60 Minutes touting The Big Short and rightfully so. He's a damned good writer and one of the bestselling ones in the past 20 years. If anybody is going to tell the story of the real-estate implosion, it might as well be Michael Lewis with the track record he has. I'd never read him before and was looking forward to his new book, but came away disappointed. Not because of the writing or the subject matter, but because much of The Big Short has been covered in other books. In essence, Mr. Lewis has been scooped by Gregory Zuckerman in The Greatest Trade Ever which was published back in 2009 and already reviewed on this blog.

Both The Big Short and The Greatest Trade Ever tell the stories of Greg Lippmann and Michael Burry among others, and, both books also give analysis as to how the real estate derivatives were created. I really related to Michael Burry. He shorted the real estate market for two years with his hedge fund Scion Capital and investors bailed on him because he was too early with the trade. Despite those that jumped ship, Burry was vindicated when the market finally turned down and pocketed 100 million dollars for himself. Seven hundred million dollars was made for the remaining investors at Scion, those that showed patience. Of the two chronicles, I liked The Greatest Trade Ever better. It was a more compelling story although you can not go wrong reading either book. They are tales that needed to be told and are probably defining points of the end of the decade. Both books make you angry at the system that Wall Street created with the help of Uncle Sam. If you want to point fingers, read either of these books and you'll know where to direct your angst. Or maybe you won't. It's a very tangled web we've weaved and I think we're not done yet.

The Big Kill

The employment report for March came out this morning while the markets were closed for Good Friday. It's a good thing for me because the futures were up after a gain of roughly 160,000 jobs. If the markets had been open, I would have taken more losses, at least at the opening bell. The unemployment rate is still 9.7%, the same as it was for February. Nothing to write home about, but the bulls have the momentum, and they liked what they saw. It's easy to second guess myself with the checkered returns I've experienced by siding with the doom and gloomers with their bearish scenarios, but they just make sense to me. Nobody is hanging me out to dry. My investments are decisions I've made based on probabilities. At first blush it would appear that I may have made the wrong choices, but my enthusiasm has not been dampened by my short investments. I still believe if I'm patient, the market will turn my way.

For instance, two weeks ago Robert Prechter was interviewed on CNBC and he went into some depth about the dividend yield for the market. If you are not familiar with the dividend yield, here is the definition supplied to us by our friends at Investopedia: "A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock." You can apply the dividend yield to an index in the exact same way you apply it to a security. To calculate this, just divide annual dividends per share by share price. According to Prechter, the dividend yield on the DOW a year ago was 4.7% and it is currently 2.6% - the third lowest reading in 100 years. The two lowest readings were in 2000 and 2007. I know that Prechter is predicting the DOW reaching 500 in the next few years in his book Conquer the Crash. Five hundred sounds a bit far fetched to me, but he gives some fairly sound statistics that we are in for a major correction.

Author Michael Panzner who writes the blog Financial Armageddon recently posted an article about the rate of change for the DOW. Now with a name like Financial Armageddon you know he's not a bull and has a bias to the dark side, but in the last two years, he's written a couple of good books When Giants Fail and Financial Armageddon. He's got some credibility. According to his recent article: "Based on data going back 90 years, whenever the 12-month rate of change in the Dow Jones Industrial Average has exceeded 40 percent, it has generally signaled trouble ahead. In three cases, a 12-month rate of change above that level has only marked a short-term pause, after which the market traded higher. But on 11 other occasions, similarly rapid advances have been followed by notable corrections, including the collapses that followed the 1929 and dot-com era peaks, as well as the 1987 crash.". According to Panzner right now the rate of change on the DOW is hovering above 40%. To me, the probabilities are in my favor of a correction coming soon, and if the market keeps climbing higher, it just means it will have further to fall.

Now what happens if we don't get the correction? Well, I'll be out a few bucks. However, the market cannot defy logic forever. If I were long, I'd get out while the getting is good. I'll stick with my modus operandi and wait for those jaw dropping valuations on stocks and reap big rewards. At least that's the plan for now. Nothing ventured, nothing gained.

Give Up the Ghost

I'm not quite ready to fall on my sword, but I think about it minute-by-minute during market hours. The DOW has quietly trudged forward going up almost every day in March to a height near 11,000. It cannot defy gravity forever and even if it does break the 11,000 mark, or go even higher, I'd be even more foolish now if I sold my short positions. I need a face-saving turnaround to stem the bleeding and stop hemorrhaging cash from the Ithaca Experiment portfolio. I'm not the only one who has called it wrong. Guy Adami, one of the professional traders on CNBC's Fast Money, has been calling for a top to the market since July and he's a pundit with an impressive resume. That's about when I started my short positions, in July of 2009, but I am taking a long-term perspective on this. I don't know what's going to happen in April. There is usually heavy selling around the middle of the month because investors need to pay their taxes. We are also at the culmination of an end of the quarter short squeeze where mutual fund managers window dress their portfolios. There may not be a single shining moment to stop the market momentum. It just might grind to a halt.

This week I had a chance to read The Road From Ruin by Matthew Bishop and Michael Green. The two coauthored a previous book Philanthrocapitalism and I was drawn to the new book because Bishop is the U.S. Business Editor of The Economist. I thought they could shine some light on the current economic troubles we are facing, or not facing anymore if you believe some in the broadcast media. They even devote one of the chapters in the book to the media and how it tends to inflate bubbles. Here they comment on a study by Alexander Dyck of the Harvard Business School and Luigi Zingales of the Chicago Business School: "The media tend to operate in a pro-cyclical way...helping inflate bubbles on the way up, but sometimes making matters worse on the way down. The bullish bias, they argue, comes from an implicit 'quid pro quo relationship between companies and journalists,' arising from the need for journalists to cultivate informed sources. In a bubble, bad news tends to be disproportionately damaging for a company's share price, as it stands out from the generally rising tide of good news.".

I'm a believer that for the most part, if you stick to the more traditional special-interest media outlets, you're much better off than some of the of the newer, less established forms. After all, if you watch Bloomberg or CNBC, or read the New York Times or Wall Street Journal in print, or Yahoo Finance on the Internet, you will get a fairly biased approach to a story. Getting your main news from Twitter or Facebook or even a blog like this one is a big mistake. As Bishop and Green point out: "The failure of the media during the crisis also speaks to the wider problems of the industry. Traditional print and broadcast media are yielding an even greater share of the market to new forms of digital media where speed is often more important than accuracy.". If you have been reading this blog, you are well aware that speed is not of the essence in my investing style. However, if you trade frequently (which I believe is best left to the pros in the pits), you might get burned by misinformation if you rely on cyberspace for your main media fix.

Wall Street is an insider's game and if you try go toe-to-toe with some of these pros, you'll be left in the dust. Television commercials bestowing the virtues of high-frequency trading platforms make no money except for the companies that advertise them. The Road From Ruin points out that it's still an old boys network no matter how hard you try to game the system: "...much valuable information continues to be transmitted informally, sometimes still in coffeehouses and other watering holes. Despite the promise that technology can make all communications virtual, thereby freeing investors to spend their days on the beach trading via laptop, in reality they and the journalists who report on their activities continue to cluster together in the financial centers, from New York to London to Dubai.". The first 200 pages of the book basically gives a history of past bubbles and how they relate to the 2008 market implosion. It's been done before, but I'm not sure how much better, so you may be able to skip that if you are well versed in financial history. The final 150 pages of The Road From Ruin gives what I consider well balanced ivory tower advice to a very complex problem. It's not a fast read, but it is informative.

The Quants

Like his Wall Street Journal colleague Gregory Zuckerman who wrote The Greatest Trade Ever, Scott Patterson tells a compelling story about the epicenter of the financial crisis in The Quants. The big difference between the two books is that Zuckerman spins a yarn about a man that made billions from the sub-prime implosion while Patterson's tale is about those who lost and lost big time. Young gunslingers at the quantitative hedge funds were unstoppable in the new gilded age racking up huge gains for years on end, but failed to program in the appropriate amount of risk in their complicated financial models. They didn't account for the fat tails of the bell curve which happens more than you'd think in investing. The result is now history of a bygone era with fortunes forever lost.

Big Iron. That's what it was all about. The quiet hum of mainframe computers churning out eons of high frequency trades with little or no regard to fundamental analysis. As Patterson so aptly puts it: "They used brain-twisting math and super-powered computers to pluck billions in fleeting dollars out of the market...These computer driven investors couldn't care less about a company's 'fundamentals', amorphous qualities such as the morale of its employees or the cut of its chief executives jib...Quants were agnostic on such matters, devoting themselves instead to predicting whether a company's stock would move up or down based on a dizzying array of numerical variables such as how cheap it was relative to the rest of the market, how quickly the stock had risen or declined, or a combination of the two - and much more.". But as the author foreshadowed at the beginning of the book: "Amazingly, not one of the quants, despite their chart-topping IQs, their walls of degrees, their impressive Ph.D.'s, their billions of wealth earned by anticipating every bob and weave the market threw their way, their decades studying every statistical quirk of the market under the sun, saw the train wreck coming.".

They had it made. After setting up their original trading programs which found small inefficiencies in the efficient market hypothesis, they basically sat back and raked it in. The computers did all of the work. It was all based on arbitrage and probabilities and while the market was in a generational bull market, there were no problems except for the bloodbath at Long Term Capital Management in the late 1990's which almost collapsed the market as well as the dot com meltdown on 2000. But they bounced back and even made money during the downturns. Not this time. It was too hot to handle: "As investors tried to unload their positions, the high-frequency funds weren't there to buy them - they were selling, too. The result was a black hole of no liquidity whatsoever. Prices collapsed.". They were trapped: "...in a self-reinforcing feedback loop. More selling caused more volatility, causing more selling, causing more volatility.".

Patterson makes a powerful argument as to why these high rollers were a huge contributing cause to the 'Panic of 2007'. He also points out there were other factors involved such as President Clinton repealing the Glass-Steagall Act in the early 1990's and former Fed Chairman Alan Greenspan keeping the interest rates too low and pumping more and more money into the system. However, Patterson does a terrific job of connecting the dots back to the beginning of the quant movement and takes you step-by-step through all of the hijinks until the market went haywire and plunged just two years ago. He points fingers, and it isn't at all of the hedge funds, only some of the more notorious ones. If you want to get the skinny on where your IRA or 401K plan went down the tubes, look no further than The Quants. It's a very good book.

The Cusp of Doom

Not counting today's action, the DOW has moved about 850 points in 5 weeks. Earlier this week Matt Nesto on CNBC reported that 88% of S&P 500 stocks were trading above their 50 day moving average so we can infer that investors are too far out on the risk curve chasing performance, but the market can still go higher. I'm not going to give you another hard-luck story, but I am getting hammered mercilessly in my short positions. The Ithaca Experiment Portfolio is on autopilot right now and will remain so for the foreseeable future despite the disappointing performance. Saying I am unfazed would be misleading, but the market tends to revert to its mean and there are plenty of problems looming on the horizon that could diffuse the bomb. Most financial planners will tell you it is best to check your portfolio on a monthly or quarterly basis and reallocate your positions once a year. This July will be the end of my fiscal year and a lot can happen by then.

Today is quadruple witching day when options expire and you should expect the market to rally, plus pick up some volume. Anybody who tells you you can't make or lose much money in a low volume market is out of their minds. This rally that started over a year ago has been very low volume. It just keeps slowly grinding skyward. According to the Stock Trader's Almanac 2010, the last week and a half of March tends to be historically weak, so maybe I'll catch a break by the end of the month. Sovereign debt default in Europe, the health care bill here domestically or some sort of terrorist attack could send this full throttle market to a screeching halt, but I doubt it. Both Meredith Whitney and Nouriel Roubini came out with statements on Tuesday saying they still see trouble for the markets in the second half of the year, especially when the Fed takes away the punch bowl and the markets kept moving higher. I'm not sure what impact Roubini has on moving the market anymore, but the prevailing theory on Whitney is that she called the sub-prime crisis and still sees another double dip in housing prices.

The majority of our GDP in the USA is comprised of consumer spending and a lot of consumer spending is dependent on housing prices. If housing prices decline, then our GDP will sink like a rock and if history is correct, so will stock prices. But this is a simplistic scenario here. It is a multi-faceted problem with many factors contributing to the market's decline like employment figures and credit card limits, both of which have been shrinking. Without money or credit, people just can't buy things. In the April issue of Kiplinger's Personal Finance, Jeremy Siegel wrote his monthly column about how stock returns were better than bonds and he may be right, but where I disagree with him is his projection of a 14.2 P/E ratio for the S&P 500 for 2010. Right now the current P/E ratio of the S&P 500 is roughly 20-21 without splitting hairs. For the P/E ratio to reach 14.2, we would have to grow profits by about 30% for 2010 and I just don't see that. I believe it is going to take many years before our economy is back up to speed. That doesn't mean the market can't rally. It has and it will, but eventually it has to prove that the fundamentals are sustainable and I don't see that happening for quite some time.

Déjà Vu

Yesterday the S&P 500 closed at 1150 which matched the January 19th year-to-date high. This is also the high for the rally that has been forging ahead since March of 2009. If I were a trader, I'd be long the market, but I'm not a trader so I will remain in my short positions even though I could be suffering considerable pain for the foreseeable future. I'm not rattled yet although the paper losses I've experienced make me second guess myself on a daily basis. It takes a leap of faith to remain leveraged and short during a 12 month run to the upside. Now, you might think I've been taken to the cleaners, but that doesn't happen until I sell for a loss. The odds are in my favor that we will see a significant correction in the months ahead, especially since the market is overvalued and we really haven't backed and filled for a significant amount since a year ago. The bulls do tell a compelling story, but I'm just not buying it. I thought bad financial news would redefine the current investing landscape and we'd be in for a white knuckle ride to the downside, but I've been proven wrong again. This market is off the charts.

People I respect tell me if a stock or your portfolio is down 50%, it takes a 100% increase to get back to even. I am well aware of this and still am not gun shy and consider myself battle tested. As I've stated before, leveraged portfolios tend to rise and fall at lights out speed. You just have to get used to the volatility. Let's see how bold I am when the S&P 500 reaches 1200. I may have to snap out of it and crawl away with my tail between my legs, but I don't think so. I felt this gnawing in my stomach two months ago when the market reached its high the last time and it turned around and headed south. With a dearth of economic news being released the next few weeks and earnings season almost a month away, we very well could drift higher now. I am prepared for that and will counter punch by doing nothing. A rope-a-dope situation, if you will.

Running on Empty

Last week the Ithaca Experiment portfolio got crushed. Most of the damage was in the the Direxion Small Cap Bear 3X Shares (TZA) because of the major move in the Russell 2000, but the ProShares Ultra Short S&P 500 (SDS) also went down significantly. Remember these are leveraged and short positions, so if the market goes up, my holdings go down - big time. This week is the one year anniversary of the market hitting it's March, 2009 low and because it's climbed a wall of worry for 12 months, I took some time to reflect on my investments this weekend and have decided to stay the course even though I've considerable paper losses on a percentage basis. I still firmly believe we are due for a major correction. If I had a magic wand or a genie in a lamp, I'd start the correction immediately because this market is trading on inertia, but I'll just have to be patient for the time being. As I've stated before and I'll say again, I'm taking big risks here, so following my portfolio advice is not recommended for most retail accounts.

Because David Walker's Comeback America was praised by Paul Volker, I took a flier on it last week and have decided not to review it even though it is an economics book. Mr. Walker is the former comptroller general of the United States and although he has written a good book, there isn't very much investing information in it. He seems to keep repeating the same themes over and over and as he states: "By now you recognize my mantra. The expansion of the government over time, excessive spending, and the continuing cry for tax relief have been driving us towards bankruptcy.". This is quite evident to most Americans except for those on the far left and to go into detail about Mr. Walker's views would be sidestepping the main focus of this blog which is to track the Ithaca Experiment portfolio and to discuss my reasons for being short the market (for the time being). Because of that, this will be a very small installment this time. However, on the docket is The Quants by Scott Patterson and from the first few chapters I can already tell there will be plenty of fodder for my next posting.

Well Respected Man

Before I get into the multitude of issues I have with Harry Dent, I'd like to begin by saying that I think he's an intelligent man and not the charlatan one financial Web site called him. After all, he's in the market timing business and to get it right once is almost a curse because your followers expect you to be on the money each and every time you open your mouth. It just doesn't happen that way. Even being in the ballpark doesn't cut it when day traders have you under the microscope. As a disclaimer, I'd like to say that I'm not a subscriber to Dent's newsletter and hot line, but do have access to them through a fellow investor that shares them with me. I also have read all of his books and find the majority of his material useful because he's an excellent researcher. His prowess as an investor is questionable, but we'll get to that in a moment.

Dent was a raging bull in the 1980's, 1990's and 2000's. I'm going by the seat of my pants here only because it's been a long time. But during the 1990's, Dent wrote both The Great Boom Ahead in 1993 and The Roaring 2000s in 1998. In The Roaring 2000s, Dent claimed that the DOW would reach 25,000 in a matter of years, only to see it come crashing down after reaching a high of 11,722 the week of January 10th, 2000. In 2004, he came out with another book, The Next Great Bubble Boom where he made another bold prediction of the DOW reaching 40,000 by the end of the decade. We all know what happened here. The Dow reached a high of 14,093 the week of October 8th, 2007 and never looked back as it went spiraling downward to the lows of March, 2009.

In fact, in the Fall of 2008 when the market imploded, Dent hung onto his bullish predictions until November when he advised clients to raise cash and get out of the market. It was a few months later at the beginning of January, 2009 that Dent wrote in his monthly newsletter urging subscribers to get back in. The market then proceeded to tank once more, but he garnered a 20% gain for his followers in 2009 if they stayed fully invested to take advantage of the current rally we are still experiencing. However, Dent is by no means a perma-bull. He's quite bearish right now (although he does see this rally continuing for another few months) and has been predicting another great depression for more than a decade. His 2009 book The Great Depression Ahead is a New York Times bestseller and rightfully so. It's a good read and I recommend it.

What I don't recommend is investing in Harry Dent's relatively new AdvisorShares Dent Tactical ETF (DENT) because it is an actively managed Exchange Traded Fund and because Harry Dent has had poor performance in the past when he ventured into the mutual fund business. As Larry Swedroe of CBS MoneyWatch wrote in September of 2009: "In 1999, the AIM Dent Demographics Trend Fund was launched, based on the demographic, economic and lifestyle trends identified by Dent. Unfortunately, the fund's results were miserable. From 2000 through 2004, the fund lost more than 11 percent per year and underperformed the S&P 500 Index by almost 9 percent per year. In 2005, its sponsor put investors out of their misery by merging it into the AIM Weingarten Fund.". Although I realize the AdvisorShares Dent Tactical ETF (DENT) is a new venture for Dent and I should give him the benefit of the doubt, I am opposed to actively managed ETFs because of their high expense ratios and believe ETFs should just be index based.

I've had the opportunity to read many investment newsletters and find Dent's to be one of the better ones because he does such thorough research and backs up his findings with cold, hard data from a variety of sources. However, I think it's how you interpret the data that gets Dent in trouble at times. He tends to be more of a technical analyst and I am a value investor and many times don't see eye-to-eye with his interpretations of the statistics he presents. He's also in the dangerous business of making short-term projections as to where the market is heading. He reports these projections in his almost weekly updates. As stated earlier, The Great Depression Ahead is an excellent book and I found it to be instrumental in determining some of my bearish stances. The rest of his books are outdated now, so they are best to avoid. I'll continue to read his newsletter while taking them with a grain of salt.

Eating Crow

Two weeks ago while the market was in a downward trajectory, I made the prediction that we were heading for a well needed 15%-20% correction and came up short. The market did correct, but only by 9% from peak to trough. Does this deter my long-term stance that we will be retesting the lows of March 2009? No. Absolutely not, although I'll probably be lambasted for being foolhardy until I meet that benchmark, or at least get close to it. In actuality, the mini-correction of a fortnight ago actually strengthened my resolve that the market will take a nosedive sometime in the next six months because it really hasn't had a healthy pullback in almost a year. November, December, January and February tend to be the four best months for the market. I'm just going to bide my time because we are almost through a seasonably advantageous time for stock prices.

Bill Clinton, Larry Summers, Alan Greenspan, Barton Biggs and Jean-Claude Trichet among a host of others all gave glowing praises to David Smick's The World is Curved: Hidden Dangers to the Global Economy and I really looked forward to reading it. If you have been following this blog, you know I try to review at least one book a week to inform readers about what is going on in the financial press and to buttress my conviction of more widespread panic in the market. Smick believes that the two decades before the sub-prime crisis were an anomaly of growth and that: "During this quarter-century, the Dow Jones Industrial Average climbed from 800 to 14,000, before the financial crisis hit. To match that stock market success in percentage terms over the next twenty-five years, the Dow would have to exceed 170,000.". So if you have a short-term time horizon and think you can keep racking up gains of 15% almost every year like we have from 1982 to at least until 2000, you are grossly mistaken.

The praise bestowed upon The World is Curved: Hidden Dangers to the Global Economy reminded me of the glowing recommendations for How Markets Fail by John Cassidy. With both books, I didn't see what all of the excitement was about. To be quite frank, reading Smick's book was quite a chore. Like with all economics books, I did get something out of it, such as the stance that China is in a bubble and that when it bursts, it will send share prices of securities from all over the globe cascading downward. This bubble could bust faster than you think because: "Most Western experts suggest that if the Chinese growth rate drops to below 7.5 percent, serious unemployment would set in, furthering political unrest and threatening the stability of the entire economic system. During 2009, the economy officially grew between 6 and 7 percent.". Smick is an experienced international financial consultant and feels China is another house of cards, just like our interconnected worldwide banking system, but only worse from its lack of transparency: "Compared to the Chinese banks, today's troubled, large American and European financial institutions look like paragons of financial purity.".

I got a lot out of Smick's chapter on China. While most soothsayers will tell you China is the engine that will drive the markets forward, he takes the opposite stance: :"...all but the most sophisticated media paint a picture of China as the great Asian Promised Land. Perhaps it will be. But in my view, China is attempting to accomplish something never achieved in the history of mankind - to marry a market economy with a Marxist political regime.". The World is Curved is a good book, but not a great book because as much as I learned about China, it wasn't enough information to warrant reading it in it's entirety. However, I did read it and it gave me added ammunition to remain in my short positions. I don't know if China will be the catalyst, but something is going to trigger another avalanche because there is just too much sovereign debt, especially in the United States. I was wrong two weeks ago and I could be wrong again, but I'll hold steady with my convictions until I see evidence that sways me in another direction.

Peter Schiff

I'm not one to kick a guy when he's down, but that's what some segments of the media did to Peter Schiff in 2008 when his client's holdings at Euro Pacific Capital allegedly decreased by 60%-70%. Mish's Global Economic Trend Analysis, a very popular financial blog, really piled on and threw him under the bus with a scathing review of Schiff's investing acumen in January of 2009. Schiff in return has written a rebuttal to all of his detractors in Crash Proof 2.0 which basically stated that he is a long-term investor and those that chided him were myopic in their leanings. Crash Proof 2.0 is the newest edition of Schiff's Crash Proof that was published in 2006 and correctly called the housing bubble and subsequent implosion in 2008. I'll give credit where credit is due and Schiff did call the financial meltdown of the housing and stock markets. His timing was impeccable, but some of that is attributed to riding with lady luck. Crash Proof 2.0 essentially reprints most of the first book and gives addendum's at the end of each chapter that were written in the aftermath of the crash.

If you are not familiar with Schiff, besides being president of Euro Pacific Capital, his resume also reads economic advisor to Ron Paul's presidential campaign, so you can infer he is to the right of right. As he says in both books: "I, along with a handful of others using the same lens, am simply applying the basic laws of classical Austrian economics. The Austrian school is not considered mainstream these days, so guys like me are few and far between.". That's probably a good thing. I've written at length about the Austrian School of economics in previous posts so I won't go into great detail about it only to say that they essentially believe in ending the Federal Reserve, going back to the gold standard and minimal government intervention. While I don't agree with Schiff and the Austrian economists who seem to be coming out of the woodwork these days, on 99% of the dogma they adhere to I do concur that there is still more fallout in the market. In the author's note to Crash Proof 2.0, Schiff states: "while most believe that the economic collapse is over, the reality is that it has only just begun. What we have witnessed thus far are merely the events that have set the collapse in motion. It will take some time for all of the dominoes to fall.".

The Dow Jones Industrial Average at 4,000-5,000. Gold at $5,100 an ounce. The dollar bottoming at 20, maybe lower. These are all eye-popping predictions Schiff makes in his book. He claims he is not your run-of-the-mill perma-bear who are like stopped clocks and can be right a couple of times. But, he has been bearish for as long as I have been aware of him. He even states in Crash Proof 2.0 that he had his clients stay out of tech stocks in the 1990s. He contradicts himself more than once during the book. For example he advises readers to invest in only conservative dividend paying foreign stocks while warning about the evils of investing in ADRs because the stocks are too big and well known. I'll call off the dogs here because the purpose of this article is not to trash Schiff, but to take another "expert's" opinion on why the market is going to correct. However, at the risk of belaboring a point, he and John Downes (who co-wrote the book) do contradict themselves at times.

The investment advice Schiff gives can be summed up as follows: Put 70% of your money in foreign stocks, 30% in gold and sit tight and wait out the crash, not in worldwide securities, but in American stocks. He deems the sun is setting on the American Empire because of all the debt the government has accumulated. Schiff believes in markets decoupling, that the greenback will no longer be the world's reserve currency and probably be replaced by the Euro. I couldn't disagree with him more. Crash Proof 2.0 is well written, but I have a problem with it in that it is like a lot of other books written by Austrian School economists. They all say the same thing except for Robert Prechter in Conquer the Crash. Prechter believes in deflation, not hyper-inflation like the rest of the herd. I tip my hat to Schiff for predicting the 2008 real estate meltdown in Crash Proof, but cannot recommend his newest book because it's a couple of years too late.

Behavioral Investing

Publisher John Wiley & Sons has done it again with its Little Book Big Profits series and come up with a gem in James Montier's The Little Book of Behavioral Investing. Anchoring, confirmatory bias, over-optimism, illusion of control, self-serving bias, hindsight bias, myopia and many other behavioral finance topics are covered in this excellent read for not only the novice, but the experienced investor as well. Most of the books in this series come from the vantage of the value investor and Montier's is no exception to the rule. In fact, besides being a value investor, Montier is a contrarian with not necessarily a disdain, but an aversion to economists, analysts and institutional investors. Montier quotes well known value investors and behavioral economists throughout The Little Book of Behavioral Investing and builds a strong case for being an independent investor, one not following the herd for out sized profits. Here is a quote from Robert Shiller demonstrating why there is so much of a lemming mentality on Wall Street: "Deviating too far from consensus leaves one feeling potentially ostracized from the group, with the risk that one may be terminated.".

Overconfidence is a topic that surfaces again and again throughout the book with the professionals getting the brunt of Montier's rancor: "When I asked a sample of more than 600 professional fund managers how many of them were above average at their jobs, an impressive 74 percent responded in the affirmative...Similarly, some 70 percent of analysts think they are better than their peers at forecasting earnings - yet, the very same analysts had 91 percent of their recommendations as either buys or holds in February 2008.". To sum it up best: "Perhaps the most striking example of overconfidence among professionals is their general belief that they can outsmart everyone else - effectively, get in before everyone else and get out before the herd dashes for the exits.". As a value investor Montier believes you should get out of the market when valuations become too rich and not follow the momentum crowd: "...when the bottom-up search for opportunities fails, investors would be well advised to hold cash. As the Sage of Omaha has said 'Holding cash is uncomfortable, but not as uncomfortable as doing something stupid.'".

The Little Book of Behavioral Investing continuously takes pot shots at the powers that be in economics and finance and spares no one: "We'll start at the top with the economists. These guys haven't got a clue. Frankly, the three blind mice have more credibility at seeing what is coming than any macro-forecaster. For instance, the consensus of economists has completely failed to predict any of the last four recessions (even once we were in them)...When an analyst first makes a forecast for a company's earnings two years prior to the actual event, they are on average wrong by a staggering 94 percent. Even at a 12 month time horizon, they are wrong by about 45 percent!". So what is an investor to do if you can't believe the professionals? Montier believes you should follow the teachings of Benjamin Graham and value companies for their intrinsic worth.

I admired Montier's moxie for taking numerous jabs at the financial "establishment" and he has every right to do so being a strategist himself with impressive credentials. I have read other behavioral finance books and still, I got a lot out of this book because it is written from the perspective of the value investor. Like Montier states: "...the curse of the value investor is to be too early - both in terms of buying (known affectionately as premature accumulation) and in terms of selling. Unfortunately, in the short term being early is indistinguishable from being wrong.". So far in the Ithaca Experiment portfolio I have been wrong because I was early to the game. I have patience though and will ride out the storm.

Hair of the Dog

The mantra that is continuously repeated throughout Keith Fitz-Gerald's Fiscal Hangover:How to Profit From the New Global Economy is: "You must begin investing on a global scale, with a special focus on China. Fail to do so and I can almost guarantee that you will be left far, far behind.". Fitz-Gerald, who has a subscriber base of 500,000 with his daily missive Money Morning, believes that a decoupling has taken place in the worldwide economy and that the BRIC (Brazil, Russia, India, China) countries with China as the lead sled dog pulling: "the world's economy and its investment markets out of the mire.". I don't agree with his decoupling theory and am from the school that the world economies commingle and are interconnected through a vast spiderweb of financial and trade relationships. In fact, I don't agree with a lot of what Fitz-Gerald proposes in his well written book except for his premise that: "this U.S. economic collapse may become the toughest in recorded history - far more destructive in financial terms than the Crash of 1929 and the subsequent Great Depression.".

I got the feeling from reading Fiscal Hangover that Fitz-Gerald has his roots in the Austrian School of economics because he stated many times in the book that the stimulus programs were a mistake. He sums it up here: "...we should never have begun the bailouts. The concept of 'too big to fail' is a total myth. History is littered with failed institutions of all kinds - from banks to brokerage companies to automakers and airlines. In the end, U.S. taxpayers will be on the hook for all of the bailout costs, either directly through higher taxes or indirectly through still more inflation.". Again, I beg to differ. If there hadn't been a bailout program, the entire free world's economic infrastructure would have come to it's knees, if not worse. Throughout the book I got the impression that Fitz-Gerald thinks he's breathing rarefied air and that he somehow cracked the code on how to solve the world's economic problems. It's just not that easy.

Fitz-Gerald spends an adequate amount of time in Fiscal Hangover giving practical investing advice, some that I agree with, some that I don't. What I concur on is his belief that right now investors should be preserving liquidity and hoarding cash. He doesn't feel we are out of the woods yet as far as the financial crisis is concerned here in the United States, but despite that, you should be putting your money into overseas securities, particularly those from the BRIC countries. As he advises: "I still firmly believe that, while maintaining a diligent safety-first attitude, you should have at least 40 to 60 percent of your assets allocated to international investments...". I don't see eye-to-eye with him on this stance for two reasons. First, I think stocks worldwide are overvalued, especially in China. Secondly, he doesn't think that ADRs are the best way to go when investing in foreign securities.

Fitz-Gerald believes in investing directly in overseas stocks by going to the foreign exchanges via specialty brokers. He recommends Euro-Pacific Capital run by Peter Schiff and International Assets Advisory if you need a full service broker in this arena. For discount brokers, he suggests Interactive Brokers, Charles Schwab Global Investing Service or E-Trade. I still believe that if you want to invest in overseas companies, the best and safest way to go is with ADRs. With an ADR, you won't need a specialty broker. Investor's Business Daily has many BRIC country ADRs to chose from. You just have to read the paper on a regular basis to see which ones are up and comers or hot established companies. If you would like more information about specific stock recommendations, the author does offer a small smattering of individual securities in Fiscal Hangover, but the best route would be to subscribe to his newsletter The Money Map Report which goes for $99.95 a year. A reasonable price for a stock newsletter.

Clawing Back

The Ithaca Experiment portfolio gained ground last week in a very volatile 5 days of trading. Nothing to get excited about, but still moving in the right direction. The S&P 500 broke a resistance level of 1065 and spiraled downward towards the next resistance level of 1035, but managed to rally back into positive territory in late trading Friday afternoon. That 1035 level on the S&P would put us at a 10% correction, which many have been predicting because these 10% corrections are healthy for the market, but still I believe we are in for a nasty downturn. Besides the Ithaca Experiment portfolio, the rest of my money is in cold, hard cash in the form of money market accounts and CDs. We are in a crisis of confidence right now with the sovereign debt problems over in Europe and the high unemployment rate here stateside, if not worldwide. I do not believe these problems are just going to blow over.

This week I read David Faber's And Then The Roof Caved In about the root causes of the housing crisis. Faber is a high profile reporter with CNBC and I wanted to read what he has to say about the real estate implosion because I have always enjoyed his broadcast journalism. The book is very well written and is informative, but not as good as advertised. When I read a finance or economics book, I am looking for ways to increase my assets or for solutions to economic problems and this one came up short. Part of the problem with the book is that it is just straight forward unadulterated reporting with very little editorializing. I don't regret reading it because it solidified my belief that we are not in your run of the mill recession. But it just wasn't enough to recommend it.

One thing I've always liked about Faber's interviews on CNBC (and one of the reasons I bought the book), is that he tends to call the interviewees on the carpet and not let them gloss over missed predictions in previous encounters. This is a glaring omission with many of the anchors at CNBC, that they don't make guests fess up to previous mistakes. It is too bad with all of the technology that we have that CNBC, or even Bloomberg for that matter, don't have databases on their Web sites that would allow visitors to drill down for previous projections. As is, we are just taking the guests' market pronunciations at face value, whether they have been right or wrong in the past. Don't get me wrong, I like the financial cable channels, but sometimes feel they are just broadcasting for the moment and not the long-term. It is reporters like Faber that make for better viewing. I just wish he had written a better book.

Aftershock

Real estate, stocks and bonds down 90% from their peak values. 40% to 60% unemployment. A depression lasting more than 20 years. These are some of the future scenarios envisioned in David Wiedemer, Robert Wiedemer and Cindy Spitzer's Aftershock, the sequel to their 2006 book America's Bubble Economy where they predicted the 2008 housing market implosion and stock market collapse. The authors believe we are currently in the midst of six co-linked bubbles which have been growing since the early 1980's and that all of these bubbles are destined to pop in the next 2 - 4 years. The six bubbles in question are: real estate, the stock market, private debt, discretionary spending, the dollar and government debt. Of the six bubbles, the first four are already in motion and once the dollar and government debt spiral downward, our economy will be rocked to the core: "...and send deep and destructive financial shock waves around the globe.". Not a pretty picture.

In many places throughout the book, the authors caution about the current government bail-out and temporary reprieve from doomsday and sum it up best: "But the dramatic government intervention only served to temporarily blunt (not stop) the effects of the underlying fundamental trend, which is why falling housing, private debt and stock market bubbles are still on their way down. In time, these trends will also include a major Aftershock that few others are anticipating: the busting of the dollar and government debt bubbles.". It's a ticking time bomb right now, at least that's what the authors claim, and in a matter of months: "multiple failed treasury auctions will mark the beginning of the government bubble collapse.". Aftershock stipulates that: "if no one will buy our future debt, we will have no way to make payments on our past debt. The U.S. government will be in default on its debt, and the big government debt bubble will fully pop.". This is when all hell breaks loose causing the dollar to contract, too.

Although timing the market is an inexact science, Wiedemer, Wiedemer and Spitzer think these interlinking bubbles will explode sooner rather than later and dole out advice for not only maintaining your assets, but building them too. The first thing they want you to do is go into cash, and when they mean cash, they are talking about short-term government bonds like T-bills. However, when the dollar bubble pops, they feel you should move your money out of government debt and into gold: "The coming gold bubble could easily last 10 or more years, and at its height, gold prices could become truly stratospheric - so high, in fact, we won't even mention our best guess for fear of losing credibility.". I don't see why they wouldn't give us a ballpark figure on gold prices. After all, they already made bold projections on unemployment rates and stock market prices. Why not go the extra mile? One problem I have with putting all of your eggs in one basket with gold is that Uncle Sam confiscated all the gold back in the 1930's during the last depression. Why wouldn't he do it again? Other ways to make money during the crash are to short the market using ETFs, the same strategy the Ithaca Experiment is utilizing, or to invest in Euros with ETFs.

Aftershock fans the flames of my current belief that we are in for a sloppy and choppy market to the downside for the next few years. Although the authors caught lightning in a bottle with their first book, it is difficult to believe they can hit the bulls eye for a second straight time, but if they are close, my current strategy will be an optimal way to increase my holdings. Like Robert Prechter's Conquer The Crash, Aftershock paints a gloomy picture of what is right around the corner not only for Americans, but people all over the world. There are two sides to every trade and right now I'm on the short side. I'm just going to bide my time and let the chips land where they may.

Pivital Point

The Dow Jones Industrial Average is down 6% from its high of 10,725 on January 19th and down 3% since the beginning of the year. This means the Ithaca Experiment portfolio is up approximately 12% from the high on January 19th - a nice run, but nothing to get excited about because it is still down 34% from the initial investment in July of last year. I've been juked out before since the market began running in March of 2009, but think this is the long awaited correction I've been writing about. The question for you to consider is do you think this is a pause in a bull market run or that pull back in a bear market rally that I believe in? Because January was a down month, I think we have to revisit an earlier post I made in December that highlighted the January Barometer. The following quote is supplied by Wikipedia: "The January Barometer is the hypothesis that stock market performance in January predicts the performance of the rest of the year...Historically if the S&P 500 goes up in January, the trend will follow the rest of the year. Conversely if the S&P 500 falls in January, then it will fall for the rest of the year. Since 1969 this trend has been repeated 32 of a possible 39 times.".

I think the odds are in my favor that this will be a down year. The January Barometer just gives added ammunition to my thesis that the damage is not done yet and we will retest the lows of March 2009, if not go considerably lower once Uncle Sam's stimulus programs are finished. In fact, the January Barometer could be a near-term catalyst and accelerate the timeline for that 10% -20% correction I have been looking for because the smart money will start to get defensive if it isn't already. I don't mean to sound naive about my losses, they are real and they do bother me, but within 2-3 months, I could be back in the black. It doesn't take too long when you are leveraged as much as I am. So for the mean time, I will continue to put my holdings on ice and wait it out. To refresh your memory, the ETFs I currenlty own are ProShares Ultra Short S&P 500 (SDS) and the Direxion Small Cap Bear 3X Shares (TZA). I realize this portfolio is a high-wire act without a safety net, but as PIMCO's Mohamed El-Erian frequently says, the market is on a sugar high and once the rush wears off, there is no telling how far down it will go.

Too Much Monkey Business

Joseph Stiglitz is the 2001 winner of the Nobel Prize in economics and recent author of Freefall: America, Free Markets and the Sinking of the World Economy. With a pedigree like that, I expected a lot out of the book, but feel he did too much armchair quarterbacking and moralizing to make this a very good read. Sure, the denizens of finance have feathered their nests with some of the TARP money and Mr. Stiglitz and I both think that something should be done about it, but he tended to grandstand too much about the sandbagging the bankers gave us. This is not to say the book is without merit and I like the way he advocates for the under privileged, but this guy is a Nobel Prize winner. I wanted more from someone of his stature. Despite his ankle biting at all the shortsighted behavior on Wall Street, he does come out with some great observations like: "Only executives in financial institutions seem to have walked away with their pockets lined - less lined if there had been no crash, but still better off than, say, the poor.".

Stiglitz really gives it to the banking tycoons with both barrels: "The bankers gave no thought to how dangerous some of the financial instruments were to the rest of us, to the large externalities that were being created. In economics, the technical term externality refers to situations where a market exchange imposes costs or benefits on others who aren't party to the exchange.". In a later chapter he expounds on this issue once more: "When gambling - speculating - on corn, gold, oil, or pork bellies didn't provide enough opportunities for risk-taking, they invented 'synthetic' products, derivatives based on these commodities. Then, in a flurry of metaphysical ingenuity, they invented synthetic products based on synthetic products.". Freefall leaves nothing in doubt as to where it stands on the issues: "The world had changed, or so the financial whiz kids had convinced themselves. They thought they were so much smarter, so much savvier technologically.". And finally: "Bankers are (for the most part) not born any greedier than other people. It is just that they may have more opportunity and stronger incentives to do mischief at others' expense.".

Mr. Stiglitz offers some solutions to the problems the banking system is experiencing, like reinstating the Glass-Steagall Act or something to the equivalent (which the Obama administration has attempted to do last week with the Volker Rule), but never quite convinces me he is the authority on the subject because I've read it all before from different economists. And this is the problem with Freefall, it's all been said by some of his colleagues in a more definitive way. When I'm reading a finance or economics book, I'm looking for ways to increase my portfolio and although Stiglitz cautions about the imminent collapse in commercial real estate, lingering problems with residential real estate and credit card debt, he really doesn't go far enough. You really have to slog through a lot of material to get to what you are looking for and to me, that's just not good enough. Unless you are an academic, I would skip this one.

Duck and Cover

The market corrected about 5% the last 2 weeks and that's a significant haircut. I don't know if this will be the 10%-20% correction that's been percolating for some time, but the clock is ticking. Resistance levels have been breached and assets may be steamrolled if you are long. I needed this pull back. I've been sweating bullets as the market reached nosebleed valuations the past six months. I may sound cavalier about the losses the Ithaca Experiment portfolio has experienced since July of 2009, but this is real money we are talking about and it is a concern. After all, who likes losing money? But the question has been bandied about as to how long this correction will last. It's anybodies guess, but I'm of the belief that if the market keeps losing ground this week, it will be a domino effect for securities. This is a big week for earnings, so hang onto your hats.

Now what if you are on the long side and think the economy is in a V shaped recovery, that this 5% haircut is merely a bump in the road? Where do you find the casino stocks investors have been bidding up the last 10 months? I would look no further than Investor's Business Daily. William O'Neil has been publishing Investor's Business Daily 5 times a week since the early 1980's and is also the author of How To Make Money In Stocks among other books. He is strictly a momentum player using volume spikes and technical analysis, two techniques I don't utilize, but many do and quite successfully. The main reasons I read Investor's Business Daily is to see what IPOs are on the horizon, to monitor the hot stocks and most importantly, they have the best articles on information and medical technology bar none.

To write in depth about Investor's Business Daily would take a book, so I'll try to do the best I can with a Cliff Notes version here. Firstly, it is a newspaper geared for traders more than investors, but if you take the perspective of a long-term investor, you can find eons of stocks that you may not be aware of trading at discounts. Investor's Business Daily doesn't cover stocks under $10, so you are immediately limiting your downside because stocks under $10 are priced in that range for a reason. The newspaper also devotes a great amount of attention to foreign ADRs that trade on the New York Stock Exchange and NASDAQ. This is important because it enables you to discover securities that are easily traded and are more transparent in hot markets as opposed to going to an overseas exchange. Another nice feature of the paper is its daily listing of the hot and cold sectors in the market. Jim Cramer likes to say that 50% of a stock's movement up or down is based on its sector rotation and with Investor's Business Daily, you can either buy individual stocks in a hot sector or purchase that specific sector's corresponding ETF to take advantage of areas that are running up.

I don't read Investor's Business Daily every day, just the weekend edition because so much of the information they give is geared toward traders and it gets redundant if you are not trading every day. But in the weekend edition, they list the IBD 100, the top 100 movers in the market based on their proprietary ranking system. This ranking system includes an amalgamation of relative price strength, earnings growth, volume and profit margins. You can discover some gems in this list, but beware, most of these stocks are not for your widows and orphan fund. They run up fast and I've seen many can't miss securities get cut in half by being short on an earnings call. If you are a subscriber to Investor's Business Daily, you also have access to their Web site where you can screen for investments. I have never used the Web site, but if you are interested, they offer a two week trial for both the print and Internet version of the paper. Although I am short the market, I still read Investor's Business Daily every weekend to keep my watch lists up-to-date in anticipation of what I may decide to invest in when I jump back into long positions. Used in conjunction with Value Line makes for a very powerful investing resource.

The Big Nowhere

Along with being a leading economic journalist, J. Irving Weiss amassed a fortune in The Great Depression of the 1930's. Following in his father's footsteps, Martin Weiss is also an economic journalist and the New York Times bestselling author of The Ultimate Depression Survival Guide. The depression Martin Weiss writes about is not from 80 years ago, but what he believes is happening all over again here today in the United States. Published in April of 2009, The Ultimate Depression Survival Guide could almost be co-authored by J. Irving Weiss because the book is peppered with his writings from almost a century ago. As is demonstrated in the book, there are many similarities in the two eras: "After the crash, the stock market rallied for almost six months, and nearly everyone on Wall Street thought the crisis was over...From its peak, the Dow Jones Industrial Average fell 89 percent. Compared to the Dow's peak in 2007, that would be tantamount to a plunge of more than 12,600 points - to a low of approximately 1,500.". And that's what Martin Weiss thinks is going to happen because the speculative bubble in U.S. homes was as extreme as the Dutch Tulip Mania, the South Sea Bubble, the Crash of 1929 and the Tech Wreck of 2000-2002.

Mr. Weiss cautions the reader that: "...history shows that, no matter how many companies may be going bankrupt or how gloomy the news may be, the stock market can often stage vigorous, but temporary, rallies...These rallies can be explosive. They can last for months. And they can give traders the opportunity to make money on the way up and even more money on the way back down.". I believe we are currently in one of these rallies that is giving investors a false sense of security because market valuations are on the threshold of the absurd. I also believe like the author that there is plenty of opportunity to make money on the downside and I have invested accordingly albeit a few months early. The Ultimate Depression Survival Guide devotes an entire chapter to shorting the market with ETFs and in that chapter lists numerous holdings offered by ProShares, Rydex and Direxion. However, he does caution that using these ETFs is a double edged sword in that if you invest too early as I have, you can get burned in the short term.

In combating the coming or current depression, the author's ace in the hole are short-term U.S. Treasury Securities, commonly referred to as Treasury bills or money market funds that own exclusively short-term Treasury securities. Reason being that in a depression it's not enough just to avoid losing money and preserving your savings, you must also have liquidity. "Even in the 1930's, when a record number of Americans were unemployed and when we had a head spinning wave of bank failures, owners of Treasury bills never lost a penny. Even in the Civil War, Treasuries were safe". Mr. Weiss provides a comprehensive list of short-term Treasury only mutual funds which I found helpful. The reason that you want liquid assets is to take advantage of blue chip stocks that will be selling for pennies on the dollar once the bottom is reached. You can buy them for a song.

Besides shorting the market with ETFs and buying Treasury bills, another strategy to make money in a depression as advocated by Mr. Weiss is to invest in the U.S. dollar: "During periods dominated by deflation, which is expected to prevail during America's Second Great Depression, concentrate on betting on a rising dollar. Use primarily PowerShares BD US Dollar Index Bullish Fund (UUP)...During perioids dominated by inflation, concentrate on betting on a falling dollar. Use primarily PowerShares DB US Dollar Index Bearish Fund (UDN).". The author states many times throughout the book that he is leaning on the deflationary scenario. Will the 'Great Recession' morph into 'Depression 2.0'? That outcome is yet to be determined, but I'm still of the belief we will retest the lows of March 2009, if not go lower. If you are familiar with Harry Dent's research, then The Ultimate Depression Survival Guide will be old news. But if you are not, this is a good starting place to find out how to protect and increase your assets in what will be a very volatile marketplace in the next few years.