Steps To Take With Your Portfolio In A Bear Market

| March 17, 2008

Are you scared yet?  I’m looking at the news of the Bear Stearns (BSC)  bailout – now takeover – and it makes me sick.  I know I wrote about this very topic Friday, but this is a huge news event and you need to know what’s going on.  You need to know the truth.

This morning the Dow Futures were trading down more than 200 points,  and as I write this, we are off more than 140.  The Japanese Nikkei lost more than 3.7%.  The London FTSE is down 2.5%.  It’s the same news around the world.  The global markets are in turmoil because of Bear Stearns.

Bear Stearns was once worth more than $150 per share but is now worth $2 . . . and that’s being generous.  Bear had a run on its prime brokerage business.  That part of the business holds the accounts of hundreds of hedge funds – worth billions of dollars.  It started off slowly with one hedge fund withdrawing their money then another.  Quickly it accelerated to the point that withdrawal demands swamped the firm and Bear Stearns collapsed.

But that’s not the scary part.

The scary part is NOT how the 5th largest investment bank in the United States became insolvent within 48 hours.  No.  The scary part is the question . . . Who’s Next?

How can we be optimistic in market conditions like this?

Here’s the silver lining to these very dark clouds (if you can call it that). The Federal Reserve stepped in and orchestrated a buyout of the firm. They didn’t let Bear file for bankruptcy, which would have destroyed the markets.  The Federal Reserve pushed off certain banking collapse and is leading an organized winding down of the Bear Stearns business. (Ben has his hands full if you ask me)

So, Bear is being bought for $2 per share, the global markets are in upheaval, and the Fed just saved us from slipping into another great depression (maybe).

What do we do with our money on days like these?

I’ll tell you what I’m doing.  I’m watching my hedged positions closely.  I’m shorting the US Dollar.  And I’m preparing for my next trades.  You should be doing all of this as well.

First off, we have been warning readers of the danger in the markets for some time.  As a matter of fact, in January, we repeated the suggestion that you hedge part of your portfolio.  There are lots of ways to hedge,  and I strongly suggest you re-read our article – “Why You Need To Hedge This Market Now!”

I followed that advice (I’m no dummy) and hedged part of my portfolio. What I did was buy puts on the NASDAQ 100 (QQQQ).  Needless to say, those puts have gone up a great deal in value helping ease the sting of the falling market.  We are in a bear market and in an economic recession.  Don’t take your eye off the ball.  Continue to monitor your portfolio and watch your hedging transactions closely.  In the case of puts, they have expiration dates so you might need to roll them over or buy new ones.

The second part of my activity today is to short the US Dollar.  Now before you get all upset and send me hate mail remember . . . I’m here to make money.  Don’t call me unpatriotic.  I have identified a way to make money, and I’m going to take advantage of it.

The Federal Reserve cut rates over the weekend because of Bear Stearns.  Everyone expects them to cut rates again at their meeting tomorrow.  Every time rates get cut, money flows out of the US and into other countries.  That’s a fact.  When money flows out of the country, the US Dollar falls in value.  I’m currently buying call options on two currencies that will benefit the most from this expected move by the Fed.

The third and final project for today is preparing for my next trades.  I’ve started making a list of great companies that I would like to add to my portfolio.  These are companies that I can own for 10 years or more.

We’ll one day fall to a level that will be known as the ‘buying opportunity of the decade’.  It’s happened before and it will happen again.

Know which stocks you like – and why you like them.  Look for undervalued companies and stocks with generous dividends.  Look for long term growth.  Before long, the time to buy will arrive and you want to be prepared.  That’s how you make money in markets like today.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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