All investors are faced today with a dilemma due to the political wrangling and gaming that is taking place relative to our huge debt problem in America and the near term requirement to raise the “debt-ceiling” in order to continue fiscal deficit spending.   No one knows for sure what will happen in the financial markets if the debt ceiling is not raised and America defaults on its current debts due.  Here is our response to a timely email that we received this morning from subscriber-friend Susan* (*name changed for privacy) asking for our thoughts on this situation…

Email from Susan – I realize that you are pretty much running all cash – I am not at this point, do you think that if Congress can’t come to a resolution regarding the raising of the debt ceiling we will see a US/Europe massive drop in the market???  My husband and I are in our 40’s so I hesitate to see everything – we can afford to ride this out.  Do you have any thoughts on this???  I currently have about 135 stocks and am fairly well diversified, not only within sectors but internationally as well.

Thank you for your time,

Susan
Thank you for your tips – I did buy ONTY (I already owned the other stocks you mentioned)

Our response –

Hi Susan – Thank you for your email.  Your questions are good ones – and not easily answered.  It has arrived at a time when others are thinking similar thoughts.  This last Sunday night I received a call out of the blue from a good friend wanting to narrow down ideas to  “insure” his portfolio due to the same concerns that you have.  He was heading out of town yesterday on business and wanted to preserve the value of his portfolio in case of near term “trouble” due to –

1. Possible turbulence near term in the markets due to possible weak earnings resulting from Q2 weakness in the economy.
2. Uncertainty as to what will happen with the world financial markets if U.S. politicians can’t find agreement and don’t raise the debt ceiling in time.

His portfolio is a NARROW mix of industrials and tech stocks with a leaning more toward tech.  He is leveraged 3:1.  Instead of simply owning the equities, he has deep in the money call options that he has purchased.  In his situation, we quickly landed on an idea for him to consider purchasing near term (NASDAQ ETF (QQQ))  put-options that would act as a form of insurance for his portfolio if the market dropped significantly.

Your portfolio is BROAD-based with 135 stocks.  With that kind of portfolio, you really “own” the market.   At Stock Market Companion, our experience has shown that when the market goes down, 9 out of 10 stocks go down with it – in an amplified manner.  Stocks move anywhere from 1x – 4x the move of the individual indices best represented by the stocks involved.  Growth stocks move 2x – 4x the move of the underlying index.  This is why I am such an ardent market timer.  By owning the individual stocks, your portfolio valuation is going to be amplified by the individual movement in response to the markets.

You correctly mention that we  are mostly in cash.   Here’s our reasoning –

1. After such a long (2 yr. 4 month) rally we would expect at least some form of pull-back in the broader market.   Anywhere from -10% to -25% would be a reasonable estimate.  But that hasn’t materialized – EVEN when the Arab world was coming apart (January – today), nuclear meltdown in Japan (March), AND our economy entering at least a “soft-patch” (April-present).  Why?  Primarily because corporate earnings are excellent and valuations (based on real earnings) are low.  Also – where else are investors going to find growth now?   Basically nowhere else – except in distressed real estate, which isn’t an area that most people are familiar with or have time to deal with.We have frequently pointed out that the equities markets are at 1998 / 1999 valuations, although earnings are significantly higher.
2. Because we time the market rigorously and look for meaningful stories for reasons to invest, we are comfortable staying on the sidelines until those opportunities present themselves = when market timing and our ideas are compelling enough to warrant significant investment.  Quite frankly, I need to do a better job at waiting until the right opportunity comes along.  My recent investments prove this.  Our short on silver in early May and our purchase of Apple at recent lows were good choices.  Others haven’t been so good.  Our saving grace has been our “toe-in” approach.

Now, back to your situation.  Your portfolio holdings in all likelihood represent a very bullish orientation to the overall market.  Your email  and timing of your message reveal reasonable concern.   It’s not easy managing 135 stocks.  You write that it may be necessary to “ride-out” near term trouble …

If I owned 135 stocks and was entering into these very unusual unchartered waters of current political and fiscal conditions, I would determine my overall returns on my portfolio, and –

Consider 1^st insuring against loss of my profits and principle.  This would be a hedge to protect profits and principle.  Geared inverse funds are a good tool to use for this if necessary.  One idea is the “SDS” = ProShares Ultra-Short S&P 500 fund.  Put options are another idea.  Put options allow me to simply pay a premium to protect my money – just as if I was purchasing an insurance policy.

If I didn’t have profits to protect, I would consider ways to sell my diverse holdings and find an easier way of investing in the markets when the time is right by using a mixture of an ETF that validates my bullish or bearish consideration of the markets and a few growth stock stories that will really push higher when the market is favorable.

No one knows what to expect over the next weeks, and investors are beginning to expect the worse.  This is why the price of an ounce of gold is back near all-time highs today.  Gold is currently priced at $1,566.00/ounce.  Beginning this last winter with U.S. Treasury Secretary Geithner, we have seen authority after authority step forward and warn against unwise actions related to the debt ceiling.  In response to this, at Stock Market Companion, we have chosen to remain mostly in cash – while taking advantage of unusual situations as they present themselves.

Here are the choices each individual investor must choose from in this current situation –

1. Hold and hope that everything turns out o.k.
2. Hold and pay an “insurance premium” by purchasing appropriate hedges.
3. Sell, raise cash, and be ready for an investing environment when opportunities are tilted more strongly in our favor.
4. Sell, raise cash, and consider doing things differently going forward.

Susan, thank you for your email.  It has arrived at a time when many are thinking the same things that you are.   I pray that this serves you and all of our subscribers.

Sincerely –

E. Stasak

Stock Market Companion

 

Disclaimer … Please remember – at the Stock Market Companion we do not and cannot give individual investment advice. According to the State of Washington RCW 21.20.005 the Stock Market Companion is not a Registered Financial Advisor and we do not render any advice on the basis of the specific investment situation of a particular individual. This information is for a wide readership and is not intended for any particular individual,  and under no circumstances should our Market Update or Watchlist be considered an investment recommendation or plan for any specific individual.  By accessing this material, you agree that the Stock Market Companion will not be held liable for any actions taken by a subscriber or other parties.  Please seek the council of a broker or other licensed investment professional for accurate pricing and concerning the suitability of all investments that you may be considering. Disclosure : You understand that the Stock Market Companion holds positions in the above mentioned securities.  Based on market related or personal events these positions may change without notice.

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