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Embrace the Bear


In 2008, years of gains were wiped away. In 2009, the key is to stay humble and focused.


I'm afraid my outlook is rather gloomy. I see more of what we saw in 2008: bankruptcies, credit contraction and the overall market getting sold off.

Right now many companies are just teetering, waiting for the holidays to end. When they fall, it will set off a chain reaction. You will see the accounts receivables of many firms take a hit. In the past, accounts receivables were pretty much as good as cash. Not anymore. If someone owes you money and hasn't paid, there could be a problem.

Looking at the components of the Dow Jones Industrial Average, AIG (AIG) was removed when it reached about $2 a share and replaced with Kraft (KFT). Kraft is a fine company, but it leaves lots of downside to the Dow. As more companies are switched out of the indexes by higher-priced companies, it could cause a vacuum as the new components trade at lower price-to-earnings ratios. Same with General Motors (GM) if it gets replaced.

And speaking of price-to-earnings ratios, there are 2 parts to that ratio. When the earnings fall, the stocks will too. When we come out of this and get to the other side, you can bet that many folks will take their money out of the market for good. Some people can't withstand losing any more than they already have.

One of these days the Federal Reserve is going to raise interest rates again, and when it does certificates of deposit and money market funds are going to look a lot more attractive. If CDS get back to 8% like t15 ago, many people will take everything they have and put it in the bank. Of course if CDS offer 8%, home loans will be 10%.

So what's going to make money? Gold (GLD) has closed up every year since 2000. Oil has been battered, but will eventually rise. It's not entirely dependent on the US economy - we may use 25% of global oil, but that means everyone else uses 75%. Energy producers would be a great place to invest should oil get back up into the $100 range.

The good news about a bear market is that it shakes out a lot of the competition. Every time you look at a stock, so is every broker, hedge fund manager, mutual fund manager and individual investor. It might be nice not to have so many eyeballs checking out the same ideas.

This is a trader's market, not an investors market. I don't care if you're a value or growth investor - admit you're mistakes quickly and move on. The people who survived 2008 set stop losses and didn't ride their investments down to zero. Make sure you're humble. You don't know everything about a publicly traded company. Only the CEO and CFO do.

And after 2008, maybe even they don't.

Position in GLD

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